We’ve all seen what the minimum wage would be if it were adjusted for inflation, but do we really understand what that means? Many people tend to think that it represents what the minimum wage would be if it kept up with inflation for all those years. I’m probably going to get a lot of backlash for this, but that’s not what it represents. It represents what the minimum wage would be in 2013 dollars and the purchasing power thereof. However, there are organizations that preach “income inequality” and advocate for ludicrous minimum wage increases that would have you believe otherwise.
I decided to take a deeper look at what the minimum wage would be if it actually would be around $21.16 or $12 per hour. Hold on to your seats, because this small amount of research I did is going to make a lot of people confused, mad, and calling me names. Hint: It’s nowhere near what anybody thought it would be.
Inequality.org: The Overblown $21.16 Minimum Wage
Inequality.org wrote an article about how the minimum wage is stuck at $7.25 per hour in 2012. They claim it should be $21.16. How did they get there? Here’s what they said:
“The minimum wage reached its (inflation-adjusted) historic high in 1968, when it was raised from $1.40 to $1.60 per hour. Adjusted for inflation using the BLS online inflation calculator that would come to $10.55 per hour in 2012 dollars.
That $10.55 figure is the focus of a nationwide campaign organized by the National Employment Law Project (NELP). In today’s political climate it would certainly be a major accomplishment to achieve a $10.55 minimum wage. But $10.55 is still far too low.
Using 1968 as our benchmark for the minimum wage implies that low-wage Americans today should be making just as much as low-wage Americans were making 44 years ago. That benchmark is — frankly — ridiculous.
Can you imagine Americans of 1968 settling for a minimum wage standard of living that had been set based on 1924 standards? What about 1880 standards? At some point we should expect low-wage workers to start living better than they used to. Don’t low-wage Americans deserve to live in the 21st century, not the mid-20th?”
First of all, as I just mentioned, the “inflation-adjusted” minimum wage peak in 1968 is only good for measuring purchasing power. But we’re not really looking for that. It doesn’t matter because, as they pointed out, we can’t measure our standards at 1968 when it’s present day in the new millennium. It’s 2015 now, we can’t be measuring the purchasing power of the past. This is a great point that they make. But the bad part is that they hurt their argument with the next part.
“A better way to update the minimum wage is to benchmark it to personal income growth in the economy as a whole.
Per capita real personal income excluding current transfer receipts — that is, the personal income earned in the economy, excluding Social Security and other government programs, adjusted for inflation — has grown by 100.6% since 1968.
In other words, the NELP has it too low — by half. If our standard for minimum wages had kept pace with overall income growth in the American economy, it would now be $21.16 per hour.”
Since measuring inflation wasn’t good enough for Inequality.org, because they want to show how big the gap in “income inequality” is, they decided to throw in per capital real personal income. That’s a real economic indicator, but that’s not a good one to throw into the mix. Here’s why: When someone is trying to show how bad income inequality is, you don’t want to use an indicator that uses the incomes of the ultra rich. They’re saying that everybody’s incomes have increased by 100.6 percent. By everybody, this doesn’t just include the rich like the other propaganda that’s written, it includes everybody.
Mother Jones wrote an article about income growth in the United States and how it’s stalled for most Americans. The chart you’re going to want to look closely at is labeled “Change in Share of Total Income.” As a matter of fact, here’s the chart:
So what’s so bad about the economic indicator, per capita real personal income with this argument? Mother Jones, another left-winged political commentary site, claimed that wages have been staggering. Add up the total share of income and you get nowhere near 100.6 percent, which was the claimed growth of the economy’s income. When Inequality.org wrote this, Mother Jones came out with this chart the following year. Clearly, these two left-winged political commentaries need to get their stuff together because now who the heck are we supposed to believe?
Those who read the article will notice that Inequality.org said that even $21.16 wouldn’t represent progress in 2012. Thus, 15 Now should understand that, if this is actually true, $15 per hour won’t do anything. Bottom line: These people need to get together and collaborate instead of create political propaganda that just contradicts each other.
Inequality.org: The Propaganda
You may be wondering how Inequality.org’s article is propaganda. This is an excellent question that should be explored a little. It’s important to know that propaganda likes to use half-truths to prove a point. Inequality.org used half-truths and spun them into its opinion, which didn’t make sense at all. How? Well, it first used a real economic indicator. Those that understand it will see that the whole “poor people are getting poorer” argument is defeated by using this indicator. This is bad for Inequality.org because minimum wage increase activism relies on that argument being valid.
What didn’t make sense to me was inflating the previous minimum wage from 1968 to show what the minimum wage should be today. On top of that, Inequality.org decided to double that amount from 1968, because it believes that $10.55 per hour is too little for people to live on. Regardless of whether this is true or not, using a personal opinion isn’t credible. What credibility is there when no research on the cost of living is done? If no research is done, how are we supposed to believe that $21.16 is where the minimum wage should be?
What If the Minimum Wage Actually Followed Inflation?
Now that we see that the minimum wage that has been adjusted for inflation doesn’t represent what we thought it did, the real question is: What would the minimum wage be if it were linked to inflation? Well, we need to understand what this means before we can get into the math behind it. In a nutshell, linking the minimum wage to inflation means that it would follow the Consumer Price Index (CPI). If we were to do such a thing, we would need to allow the minimum wage to fluctuate rather than keep it from decreasing.
How I Calculated Minimum Wage Increases
First of all, I’m not able to use all of the minimum wage data from the Department of Labor (DOL) because the minimum wage was implemented in 1938. The reason why we can’t use the previous data is because when we get annual data for the CPI (inflation), the earliest year we can really find is 1948. Thus, the earliest minimum wage data that is usable here is 1947’s minimum wage.
Secondly, it’s important to understand that this isn’t an analysis of comparing previous minimum wages and inflating them to the present day. It’s an increase or decrease, depending on the CPI, of the minimum wage since 1947. This means that if the CPI increased by 2 percent, the calculation that I will make will add 2 percent to the minimum wage. This is so we can see what the minimum wage would actually be if it were linked to inflation and fluctuated with it.
Thirdly, the CPI that I used is the percent change from one year ago. This was so I could just add 1 and then multiply it by the previous year’s minimum wage. This is important to note because the CPI is an index and just has an indexed number by default.
The equation that I used for calculating the adjusted minimum wage is as follows:
AMW = PW x (1 + CPI)
AMW – Adjusted Minimum Wage
PW – Previous Wage
CPI – Consumer Price Index
NOTE: Adjusted Minimum Wage is not adjusted for inflation. It is simply increasing the wage at the same rate of annual inflation.
Below is a simple table of the results of linking the minimum wage to inflation. Starting with 1947’s minimum wage of 40¢ per hour, I used the previously stated equation.
|Date||CPI (%)||Adjusted Minimum Wage|
Where the Minimum Wage Should Be
Interestingly enough, we hear about where the minimum wage should be due to the purchasing power in today’s dollars. If we were to account for inflation correctly, then in theory, the minimum wage would fluctuate. In this case, the minimum wage should be at $4.24. This means that, currently, our minimum wage is $3.01 over the amount we should technically be at right now.
The question will surely arise, “How would we pay for anything with that kind of low wage?” The answer is very simple: The market, following the laws of supply and demand, would regulate prices for us. Since a 40-hour work week would produce a pretax income of $678.40 per month, many people wouldn’t be able to afford a high price on everything. However, I do not recommend setting our federal minimum wage that low from where it is right now. But for the sake of answering the question of how people could afford anything, it’s important to understand that not very many people would actually accept such a low wage.
The Minimum Wage Would Drive Up Due to Higher Employment
The market would drive the wages up little-by-little until people would start to accept jobs. That would become a socially-driven minimum wage. However, the reason for an increase in starting wages at companies would be due to the increase in employment. Some may ask, “How would higher rates of employment increase the minimum wage?” Just like earlier, the answer is simple: Supply and demand affects the price of labor (wages) the same way it affects the price of goods and services.
If McDonald’s was opening a new restaurant where the unemployment rate was relatively low, it would have a hard time finding employees to work for them. It might hire 10 employees to start. But once the employees can’t keep up with the demand, there will need to be more employees on shift each day. Eventually, if the demand for labor were high enough, and that’s not too hard to get to when you’re more desperate, McDonald’s would end up raising its starting wages to $10 per hour. Sure, it might really get around $9 per hour in federal minimum wage states. But that’s still better than $7.25 or $4.24 per hour regardless.
Actually Linking Minimum Wage to Inflation
So what would happen if we actually linked our current minimum wage to inflation instead of going back and calculating it throughout time? I’m not exactly sure, but if lawmakers seriously considered it, I would be intrigued. If you think about it, it would force a lot of prices to stay lower for a longer amount of time. This is mainly because the increases are small. Companies can’t decide to increase their prices by a few dollars when people only receive pennies in increases each year and still be profitable.
I decided to do the math on the current minimum wage and link it to inflation. If we had linked the minimum wage to inflation in 2009, when it was raised to $7.25 per hour, then this year, 2015, would have a minimum wage of $8 per hour. Interesting to think that after five years, we would see an increase of only 75¢ per hour. This would satisfy the desires of both sides of the political spectrum: We would see increases in the minimum wage, but it wouldn’t kill small businesses. Why wouldn’t this kill small businesses? Because the minimum wage won’t always increase, which will decrease the cost of labor.
How long would it take for our minimum wage to get to $15 per hour? Quite a while. If we saw the exact same pattern for annual changes in the CPI between 2009 and 2014, meaning it would just repeat, then the federal minimum wage would be $15.12 in 2046. No ridiculous spikes in the minimum wage of 200 percent to $15 per hour like we saw in Seattle and San Francisco. No jobs will be killed immediately, giving ample time for people to make plans of what they’re going to do with their business and employees can plan on what they can do to make themselves more valuable to their employers.
How to Not Be Fooled by Propaganda
There’s a really easy way to tell if what you’re reading about economics is propaganda or not. First of all, you need to see if what is being written about economics is actually following the laws of economics. If the laws of supply and demand are correctly being followed, then you know that it’s probably economically sound. If it defies the laws of economics, it will take a lot to be economically sound and not propaganda.
Second, you should be able to replicate what’s being written. If someone gives you an equation and tells you what the variables in it represents, then it should be replicable. If it’s not, then it would easily be rejected in a peer reviewed journal. In my article, I gave a simple equation and clearly labeled the variables in it. Go ahead! Check my work. I welcome it. People who write propaganda will not simplify their equations as much as they can and they probably won’t seriously welcome you checking their work unless they make their math hard. Please understand that a lot of economics uses calculus, differential equations, and plenty of other higher levels of math.
Lastly, see if the author of what you’re reading has a history of violating the laws of economics for a potential political gain. I’m sure there’s a lot of people that will say that this entire article was 2,000+ words of propaganda and false allegations. I try my best to not be biased because I use the scientific method. If linking the minimum wage to inflation proved that it wouldn’t work out, I would’ve written that it would kill small businesses. If I would’ve found that Mother Jones and other writers of political propaganda were economically sound, and credible, I would’ve said so.
I hope that all of my readers take everything in this article to heart. The minimum wage is something that shouldn’t be increased to whatever amount we think is good because it’s a quick, temporary solution. We need to think about unintended consequences, long-term benefits, and inflation control. These things take time to figure out and are very serious. It shouldn’t be taken lightly. Sadly, these days, it’s taken very lightly because we see people who just want to slap a band-aid onto our economy. I say that enough is enough. We’ve seen little help from these economic band-aids.