Tying the minimum wage to inflation: the case for and against

As the ball dropped on New Year’s Eve to kick off 2023, the minimum wage automatically increased in more than a dozen states where that figure goes up annually to match inflation. 

New York, with its $15 minimum wage, more than double the national minimum of $7.25, was not one of them. But it could be in 2024 if Gov. Kathy Hochul has her way. In Hochul’s State of the State speech earlier this month, a proposal to index the state’s minimum wage to inflation was a centerpiece of an offering that was peppered with big ideas but short on details.

THE CASE

There are numbers already indexed to inflation that affect every American, with Social Security benefits and their 8.7% hike for 2023 leading the list. Federal tax brackets are indexed to inflation, too: The $27,700 standardized deduction for married couples, for instance, is $1,800 higher this year than in 2022.

And when such figures are not indexed to inflation the long-term effect, in a nation with an increasingly gridlocked political system, can become disastrous.

The federal gas tax has been stuck at 18 cents per gallon for 30 years, a span in which both gas prices and the cost of building, maintaining and repairing the roads that this tax supports have skyrocketed, even as fuel efficiency increased and hybrids and plug-ins were introduced, cutting gas tax revenue further. Political will to increase the federal gas tax no longer exists. If the 1992 increase had come with a law tying it to inflation, the gas tax today would be 39 cents per gallon, and our interstate highways would be in better condition. 

Until 1975, Social Security benefits did not rise with prices, but instead relied on congressional and presidential approval for each hike, leaving senior citizens in the lurch for years. None of the federal tax code was indexed to inflation until broad changes in the 1980s, so as wages rose, workers saw their increased income put them in more expensive brackets even as the buying power of those earnings decreased. The Alternative Minimum Tax was never indexed to inflation, and on Long Island morphed from a check on the wealthy to a millstone for the upper middle class.

States and local governments tying the minimum wage to inflation have almost always done so by referendums that rarely fail, and are common in red states and blue. That’s not surprising: When the minimum wage goes up, higher earners see more money, too, a popular proposition with most voters.

THE COUNTER 

The argument against indexing the minimum wage to inflation is essentially the same rationale against ever raising the minimum wage. Some economists argue that raising the minimum wage forces businesses to lay off or not hire employees, killing jobs. They argue that many minimum wage jobs are held by young people who live with family and have few bills. And they maintain that low-wage workers are extremely sensitive to the price increases that come with minimum-wage hikes, because they spend a high percentage of their pay on food, clothing, and other goods and services produced by other low-wage workers.

Indexing in the case of an inflation wave like the one currently underway, opponents argue, would force businesses already paying fast-increasing prices for their materials, fuel, rent and other expenses to hike pay when they can least afford it. That would also force such businesses to raise prices, pushing inflation to new heights via a wage/price spiral.

OUR TAKE 

Not all inflation indexing is alike, and not all monetary support for low-wage workers comes via wages. As Hochul fleshes out her plan, some options to consider include:

• Capping the increase as, for instance, California (3.5% annually) and Minnesota (2.5% annually) do. A provision could also allow needed hikes above the capped amount to be banked and added in later years until wage jumps catch up to prior price jumps.
• Setting a differential between large and small employers. Minnesota’s maximum minimum-wage increase for both is 2.5% annually even when inflation exceeds that number, but the minimum for small employers is $8.63 per hour, while for large ones it’s $10.59. New York could cap increases for the mom-and-pops, but not the giant employers more able to withstand increased expenses.      
• Protecting low-wage workers who need help most by increasing earned income tax credits. That gets money in the hands of struggling families but keeps wages affordable, and doesn’t divert resources meant for those who need it most to teens and secondary wage earners in prosperous households.
• Putting the earned income tax credit in every paycheck by suspending state payroll deductions for those employees when inflation is high, rather than giving it back to them once a year at tax time.

Hochul isn’t wrong to want to help low-wage breadwinners. And indexing is almost always the right way to keep politically unpopular rates that are sensitive to inflation in line with reality.

But increasing the minimum wage doesn’t help workers if businesses fail, or fire, or simply fail to hire. For politicians, as for workers and business owners, a little creativity could go a long way.