“Republicans Cut Minimum Wage by 21%” – or – “Do-Nothing Congress is Something of a Misnomer”

This week, Democrats are threatening to block a bill that would give members of Congress a raise until the minimum wage is increased. While I applaud the Democrats in Congress for re-opening this issue, minimum wage should not be subject to political winds. Since 1938, the annual minimum wage (based on working 40 hours per week, 50 weeks per year) has ranged from $6,807 to $18,621 in 2006 dollars. During that time minimum wage has ebbed and flowed, creating instability and unpredictable incomes for the poorest American workers.

Much of this instability is masked by inflation. Inflation silently eats away at minimum wage when Congress is in a do-nothing sort of mood. In 1981, the Democratic Congress raised the minimum wage from $3.10 to $3.35 where it remained for 8 years. Unfortunately, that same $3.35 in 1981 was only worth $2.46 by 1989. Effectively, inaction on minimum wage cut worker pay by 27% between 1981 and 1989.

Not to be outdone, the Republicans increased minimum wage from $4.75 to $5.15 in 1997, where it has remained ever since. Unfortunately, that same $5.15 in 1997 only buys $4.08 of goods in 2006, a reduction of 21% due to inflation.

The Democrats have proposed raising minimum wage by $.70 per year until 2009 when it would top out at $7.25/hour. This would raise minimum wage by about 15% annually. While this proposal does rescue minimum wage – and Congress – from the ignominy of falling below the poverty level for the first time since 1949, it is a sudden increase for those who employ minimum wage workers.

Inaction (or sudden action) on minimum wage creates wage cost volatility for employers. Jarring increases in the wage costs make it more difficult for businesses to plan.  These infrequent and unpredictable increases in minimum wage can also create a political backlash from small business owners.

The solution is to create an automatic, annual increase of the minimum wage based on either the federal consumer price index, or some fixed percentage over the federally-determined threshold for poverty. Make minimum wage more transparent to employers and the working poor, and let do-nothing Congresses get back to their flag burning amendments.

*Historical Minimum Wage assumes working 40 hours/week, 50 weeks/year and is adjusted by the CPI.

^#U.S. Census Bureau 2005 Poverty Threshold for single person under 65, adjusted upwards by 3% for 2006 estimated inflation.

^6.27.06 - Reuters reported a Democratic proposal in Congress to raise minimum wage by $.70 per year until 2009 when it would top out at $7.25/hour.