At first glance, the increases appear to be very generous. However, when adjusted for inflation (using the Consumer Price Index for All Urban Consumers), the recent wages are quite modest in historic terms. To see this, consider the minimum wages before and after changes over the last four decades.
| Year | Nominal value | Real value (2008 dollars) |
|---|---|---|
| 1968 | $1.60 | $10.06 |
| 1973 | $1.60 | $7.88 |
| 1974 | $2.00 | $8.88 |
| 1975 | $2.10 | $8.54 |
| 1976 | $2.30 | $8.84 |
| 1977 | $2.30 | $8.30 |
| 1978 | $2.65 | $8.89 |
| 1979 | $2.90 | $8.74 |
| 1980 | $3.10 | $8.23 |
| 1981 | $3.35 | $8.06 |
| 1989 | $3.35 | $5.91 |
| 1990 | $3.80 | $6.36 |
| 1991 | $4.25 | $6.83 |
| 1995 | $4.25 | $6.10 |
| 1996 | $4.75 | $6.62 |
| 1997 | $5.15 | $7.02 |
| 2006 | $5.15 | $5.59 |
| 2007 | $5.85 | $6.17 |
| 2008 | $6.55 | $6.55 |
| 2009 | $7.25 |
Over the last 40 years, the real value of the minimum wage has been as high as $10 per hour (1968) and as low as $5.59 per hour (2006). Over the decade of the 1970s the real minimum wage averaged $8.61; over the 1980s, it averaged $7.04, and over the 1990s, it averaged $6.59.
Today's value of $6.55 is below all of those averages. Assuming that inflation over the next year is at or above 4 percent, next year's nominal increase to $7.25 would be worth less than $7.00 in today's dollars--below the average from the 1980s and below the value from 1997. All in all, these are very modest amounts.
Minimum wage policy is subject to intense political squabbling. Democrats generally favor higher minimum wages on fairness grounds. Republicans generally oppose the increases because they raise costs for businesses and can reduce employment. In the past, these differences have led to long impasses where the nominal wage remains fixed. Before the 2007 legislation, the minimum wage had not been adjusted in a decade. Minimum wages were also fixed in nominal terms for five years in the 1990s and for nine years in the 1980s. During these periods, the real value of the wage declined substantially.
Regardless of your views on the effectiveness of the minimum wage, this is a terrible way to make policy--letting the wage drift down and then coming back with large adjustments every year. It's hard to rationalize a saw-tooth pattern in wage rates.
A modest proposal is to accept that next year's value of $7.25 represents a consensus of where the federal minimum wage "should" be. If this is the consensus value, it should be automatically adjusted/indexed for inflation starting in 2010. Should a new consensus or new circumstances develop, the wage could subsequently be legislated up or down. Effectively, indexing would change the default for minimum wage policy from one in which the real value generally erodes to one in which the real value stays constant.
Businesses and their conservative backers should be willing to accept indexing because it removes some uncertainty from wage policy, keeps the wage at a historically modest level, and takes the steam out of progressive calls for wage jumps. Progressives should accept it because it establishes the minimum wage near its highest real value in the last 20 years.
What about it Washington?
