“It’s hard”: Should Minimum Wage Keep Up with Inflation or Productivity Growth?

For years, the minimum wage in the US has lagged behind productivity growth and inflation. The question is no longer whether any changes should be made but how they should be made—how quickly and drastically.

Falling Behind Inflation

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If the minimum wage had been updated to keep pace with inflation since 1968, it would be $21.50 per hour.

Linking minimum wage to inflation protects the purchasing power of low-paid workers.

Lagging Productivity Growth

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More importantly, the minimum wage has not risen with economy-wide productivity, which has soared. 

Productivity measures output per hour worked. Workers becoming more productive boosts company profits and broader economic growth.

Imagine a $21 Minimum Wage

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A minimum wage of $21 would uplift low-paid workers. A full-time worker would earn $43,000 annually, elevating a two-earner couple into the top income quintile. 

Higher pay at the bottom would dramatically compress wage inequality.

Counterargument: Uneven Productivity Growth

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Some argue that minimum-wage workers have not become more productive, so they do not merit higher pay. But this superficial observation ignores policy choices that have devalued certain kinds of work.

Institutional Biases Suppressed Low-Wage Productivity

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Rules systematically redirected productivity gains to the top. If policy favored the bottom, outcomes would change. 

Cheap drug imports and streamlined medical licensing would reduce doctors’ pay and boost funds for raises.

Policy, Not Workers, Caused Productivity Imbalances

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Stagnant productivity for low-wage workers is not their fault. It’s the result of policies structuring the economy against them. With supportive institutions, the minimum wage could have advanced with productivity.

Gradual Change Needed

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Restoring the link between minimum wage and productivity growth will require gradual change. 

Some increases are possible with little effect on employment, but the scale of change needed to reach $21 quickly would risk severe dislocation.

Historical Context

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Before 1968, the minimum wage rose steadily alongside broader economic gains. Workers shared the benefits as productivity increased.

Disconnect Since 1968

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But for 50 years, the minimum wage has been disconnected from overall growth. While the economy expands, low-wage workers are left behind.

Inequality Is Growing

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As a result, inequality has soared. Income accruing to those at the top has skyrocketed, while pay for those at the bottom stagnates. 

The current minimum wage reinforces unequal outcomes.

Raising Pay Boosts Economy

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Higher wages at the bottom will pump more spending into the economy. Low-paid workers have a higher marginal propensity to consume. They spend additional dollars rather than save. More consumer demand creates jobs.

Small Businesses Can Adapt

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With phased increases, small businesses can adapt to higher labor costs through modest price increases and productivity improvements. 

Larger corporations will readily absorb the changes.

Gradual Wage Hikes Preferred

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Some argue that a sudden minimum wage increase could lead to an increase in unemployment. It might be better to raise the minimum wage gradually.

Questioning Statistics on Low Wages

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Minimum wage statistics are complicated by workers like waiters, who might make a decent living with tips but have a much lower official wage. Regardless, tens of millions of Americans currently make $20 or less an hour.

Path Forward

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The goal of broadly shared prosperity has been lost over the past five decades. To rebuild an economy in which low-wage workers again share in productivity gains will require gradual, systemic changes to policies and institutions. 

With thoughtful implementation, the minimum wage can be restored as a vital pillar that supports rising living standards for all.


Author: Christopher Alarcon

Title: Journalist

Expertise: personal finance, side hustles, time management


Christopher Alarcon is a journalist with a deep passion for personal finance. He has contributed to major online publications, including MSN, Wealth of Geeks, and Business Insider.