The Dream of a $15 Minimum Wage Gets a Reality Check From Inflation

For most of the decade, support for a $15 national minimum wage has grown among Democrats. Once seen as a fringe idea when it was introduced in 2012, at least 19 Democrats running for president in 2020 support the increase. Last week, the U.S. House passed a bill that would raise the minimum wage to that hourly rate by 2025, which could boost the incomes of 17 to 27 million workers, according to the Congressional Budget Office. But by then, inflation could make an increase to $15 seem like too little, too late.

Over the course of the U.S.’s 81-year history of a federal minimum wage, Congress has never introduced an automatic adjustment technique to let the minimum wage rise or fall in line with price changes. Instead, a series of irregular updates has instantly boosted the wage’s purchasing power after varying periods of inflationary decline. The current $7.25 national minimum wage, for instance, is now worth 16% less than when it was enacted in July 2009.

Up and Down (But Mostly Down) for the Last 50 Years

U.S. federal hourly minimum wage

Note: Inflation adjustment uses CPI-U-RS through 2018, Bloomberg consensus forecast for 2019. Earliest available CPI-U-RS figures are for 1947.

Sources: Bureau of Labor Statistics, U.S. Census, Bloomberg

Proponents of a higher minimum wage want to change all this by locking in wage increases for future years. There are two common ways to achieve this: Index to price inflation to guarantee the minimum wage can always afford the same theoretical basket of goods, or index to the increase in the median wage. While the first approach means a minimum-wage worker’s standard of living remains flat, the second makes sure they share in any gains from a growing economy.

The Raise the Wage Act passed by the House on July 18 would implement the latter strategy. But even though that represents the more aggressive indexing approach, the starting point for the new wage floor will have effectively fallen 20% since the debate began in earnest. By 2025, a $15-an-hour wage would be the equivalent of $11.93 in 2012, when the Fight for $15 movement started. To truly reflect the original demand for $15, the Raise the Wage Act would need to call for $18.87 in 2025.

“Fifteen dollars by 2025 is a very moderate standard for the country,” said Paul Sonn, the state policy program director at the National Employment Law Project, a nonprofit firm that promotes workers’ rights and backs the $15 minimum wage. “Even in the low-cost states it’s the minimum that workers will need by then to afford the basics,” he said. “In the high-cost states, it’s already not enough.”

How Much Is $15? It Depends When You Ask

Note: Inflation adjustment uses CPI-U-RS from 2012-2018, Bloomberg consensus forecast for CPI-U for 2019-2021, and assumes 2% for 2022-2025.

Sources: Bureau of Labor Statistics, U.S. Census, Bloomberg

Only three House Republicans voted in favor of the bill and Senate Majority Leader Mitch McConnell has already declared that he will take no further action on the measure in the upper chamber. Many conservatives have long opposed the very existence of a minimum wage, let alone an increase in its rate. Larry Kudlow, director of the National Economic Council, has called the federal law “a terrible idea.” Opponents to such laws claim they place undue burdens on businesses and cost jobs. Decades of research has led economists to different conclusions on minimum-wage laws’ effects on employment, incomes and societal well-being. It’s all left Washington at a standstill on the minimum wage.

With inaction in Congress, some states and cities have raised the minimum wage on their own. Twenty-nine states and the District of Columbia have minimum wages higher than the federal level. Since 2014, voters in nine states have approved higher minimum wages through ballot measures, while legislatures in 17 others have enacted them. There’s some form of inflation indexing in 17 states, while seven have enacted wage increases for a set time period, after which no adjustment is currently planned.

Where States Will Stand Without a New Law

Minimum hourly wage (nominal) in 2025 according to current legislation

Note: For states with planned inflation adjustments between now and 2025, figures use Bloomberg consensus forecast for CPI-U for 2019-2021 and assume 2% inflation for 2022-2025.

Source: National Conference of State Legislatures

Michigan currently has the longest time horizon of any state for fixed minimum wage increases, set through 2030. They represent a 28% pay rise in nominal terms. But if inflation continues at a 2% annual rate, the true increase will amount to 4.7% over 11 years. Once that statutory maximum is reached, inflation will steadily eat away at the minimum wage’s buying power.

This erosion will start much earlier for states like Massachusetts, which has scheduled gradual increases to $15 by 2023, but hasn’t codified any future automatic inflation adjustments.

Final Figures Are Lower Than They Appear

Scheduled minimum wages absent further legislation

Source: National Conference of State Legislatures

And then there’s New York, where inflation indexing is unlike that of any other state. In April 2016, Governor Andrew Cuomo boasted at a rally that “we won $15 for all employees in the state,” referring to new legislation passed earlier that month. But the law actually set varying targets depending on the county and size of business and doesn’t guarantee upstate workers a $15 minimum wage by any set date. Rather, workers in all counties outside of New York City, Long Island and Westchester will receive $12.50 in 2021, after which annual increases will be indexed to inflation and other unspecified economic indices until they reach a maximum nominal level of $15. 

That means the purchasing power, or real value, will actually max out at $12.50 in 2021 dollars, assuming inflation serves as the bulk of determination for future wage increases. Or, in 2016 dollars, when Cuomo told workers he was raising the minimum wage “to $15 to show decency and humanity for all,” he was in fact delivering upstate workers a new wage of $11.33.

Never Quite Making it to $15

Scheduled New York state minimum wages, as announced in 2016

Note: Assumes 2% annual inflation from 2022 onward and no further legislation.

Source: New York Department of Labor

For now, these kinds of state experiments will continue to be the primary source of increasing pay for America's lowest-wage workers—at least until 2020, when Democrats might have better luck pushing a wage increase into law if they win back the presidency and control of the Senate.