Inflation has been the talk of the town recently with the annual Consumer Price Index (CPI) recently hitting a 40-year high of 9.1%. However, for financially squeezed families, rising prices are only one half the story.
As the cost of everything from fuel to food increases, the value of the dollar decreases. That means workers are seeing the purchasing power of their paychecks shrink. In fact, the value of the federal minimum wage is now at its lowest point since 1956, according to an analysis by the Economic Policy Institute (EPI).
“When you have a general rise in the inflation level, it erodes the value of money,” says Peter C. Earle, economist with the American Institute for Economic Research.
At the same time, a more mobile workforce and continuing labor shortages could help counteract the effects of inflation, and might actually boost wages for some low-income occupations.
Minimum Wage vs. Inflation: Wages Worth Less Today
The federal minimum wage was last increased in 2009, when it rose to its current level of $7.25 per hour. When adjusted for inflation, the high-water mark for minimum wage occurred in 1968, when it was the equivalent of about $12 per hour in today’s dollars.
In the 1960s, increases in the minimum wage were an outgrowth of the civil rights movement, according to Ben Zipperer, an economist with the EPI. At that time, the law was also expanded to cover industries, such as retail and restaurants, that were previously excluded from minimum wage provisions.
Since then, there has been a downward trend in how often the minimum wage has been increased. “Congress has been less willing to raise the minimum wage,” Zipperer says. And when they do, he adds, those increases may be smaller, when adjusted for inflation, than ones approved in the past.
Proposals to raise the minimum wage have turned into partisan battles, with Democratic lawmakers saying larger increases are necessary to support working families while their Republican counterparts argue a higher wage will hamper business growth and cost jobs. Last year, competing bills were introduced by members of each party to increase the federal minimum wage to $15 and $10, respectively, but both are stalled in Congress.
“This is very clearly a policy decision,” Zipperer says. “We pay the low-wage workers in our economy roughly 40% less than we did more than 50 years ago. That just blows my mind because we are a much richer country now.”
Other Government Policies May Be to Blame
Not every economist thinks the declining value of minimum wage is the responsibility of Congress.
“Nothing could be further from the truth,” Earle says. He argues government policies are at play in the dollar’s declining purchasing power, but those don’t have to do with the federal minimum wage.
“Trillions of dollars were created to keep the economy liquid (during the pandemic),” Earle says. “That has consequences.” He points to the increased money supply as fuel for the inflation that is eating away at the value of workers’ wages.
To counteract inflation, the Federal Reserve has increased the federal funds rate four times so far this year. By making it more expensive to borrow money, higher interest rates are intended to cool the economy and reduce inflation. The risk is that the country could enter a recession, which could create new problems for workers.
“By raising interest rates, [the Fed is] going to slow the economy and that means fewer people are going to be employed,” Zipperer says. “That has a pretty strong dampening effect on wage growth.”
Labor Shortage, Great Resignation Impacting Wages
It’s not all bad news for wage earners when it comes to wages vs. inflation. There are some forces at work in the current job market that are pushing up hourly rates for some positions that traditionally paid minimum wage.
“Inflation is a reality. The labor shortage is a reality. And the Great Resignation is a reality,” says Jay Starkman, CEO of Engage PEO, a company providing human resources outsourcing solutions.
While the minimum wage may be declining in value, workers in low-income jobs may be making significantly more than they were a few years ago. Within the past year, some retailers have raised their starting wages to as much as $15 per hour or more.
“Employees are more willing to change jobs now than they ever have been,” Starkman says.
That’s a global phenomenon, with 40% of workers worldwide thinking about quitting their jobs in the next three to six months, according to management consulting firm McKinsey & Company.
In the U.S. alone, the Bureau of Labor Statistics (BLS) found 4.2 million people quit their jobs in June. Among those who left their jobs last year, low wages was the primary reason cited in a Pew Research Center survey.
Businesses know people are willing to walk away from employment for a better opportunity, and this gives workers leverage to request raises if they feel they are underpaid. Starkman says he has seen fast food restaurants go so far as to offer sign-on bonuses and retention bonuses to attract staff.
At the same time, companies are also feeling the effects of inflation and that puts limits on how much businesses—particularly smaller ones —are able to pay. “Employers have to take inflation into account when setting wages,” Starkman notes.
The pandemic may also be weighing heavily on some business owners’ minds, according to Earle. “A certain portion of what’s happening has to do with business confidence,” he says. If companies are concerned about future shutdowns or government restrictions, they may be less inclined to invest money in their workforce and wages.
Future of Wages Could Be a Mixed Bag
All of this paints a murky picture of how wages will be affected by inflation and other economic conditions in the future.
“Short-term, I think you’re going to see pressure on wages,” Starkman says. That could mean increases in pay for some hourly earners, and “I do think the increased wages are here to stay,” he adds.
Long-term, once inflation subsides and the job market stabilizes, Earle believes companies may continue to pay existing workers at a higher rate but revert to lower wages for new hires.
What doesn’t seem likely is an increase in the federal minimum wage. President Joe Biden signed an executive order last year increasing the minimum wage for federal employees and contractors to $15 per hour in 2022, but efforts to raise the federal wage for all workers have stalled in Congress.
In the absence of federal action, many states and cities are raising their own minimum wages. “We have two cultures when it comes to minimum wage,” Zipperer says, referring to the divide between states that follow the federal minimum wage and those who have created their own.
Twenty states adhere to the federal minimum wage while 30 have raised—or are in the process of raising—the rate for their workers. There are also 46 cities and counties nationwide with minimum wages above the federal level.
Still, 57% of workers say their income isn’t keeping up with inflation, and for them, it is unclear whether there’s any relief in sight.