Recently, Seattle passed a new minimum wage bill that will increase the minimum wage to $15.00 for all employees by 2021 (some will receive that wage earlier). Much of the commentary around minimum wages often cites the inflation adjusted federal minimum wage of $10.98 in 1968 as the highest federally mandated minimum wage in the nation’s history. This got me thinking about what policymakers should take into account when deciding on a minimum wage. In my opinion, it depends on what they view the purpose of the minimum wage to be, and a large number of policymakers may want to consider adjusting the minimum wage for both inflation and productivity increases.
The first view of the minimum wage is that it should be a basic living standard for someone who is fully employed. Under this view, a policymaker might want to index the minimum wage only for inflation – that is, to make sure that the minimum wage will provide the same living standard throughout time.
The second view of the minimum wage is that in addition to providing a base living standard, it also serves to equalize the bargaining power of employees and their employers. Under this view, the minimum wage should not only increase with inflation, but it should also rise as workers become more productive. Therefore, a policymaker should index the minimum wage to nominal per capita GDP – this would ensure that someone earning the minimum wage earns the same fraction of per capita GDP throughout time.
With these two views in mind, let’s take a look at history. If we only adjust for inflation, the peak value of the federal minimum wage occurred in 1968, when a worker earned the equivalent of $10.98 per hour today. By this perspective, the $15.00 per hour minimum wage in Seattle looks historically high:
If we also adjust for productivity, then the picture changes. A simple way to adjust for both productivity and inflation is to index the minimum wage to the level of nominal per capita GDP. Nominal per capita GDP increases for two reasons. First is inflation, which increases prices, and therefore the dollar value of GDP. The other reason is due to increased productivity, that is, as technology improves and each worker can produce more, we produce more goods and services.
Taking this second view, the minimum wage peaked at $20.48 in 1956, and didn’t fall below $15.00 per hour until 1971. This view would support the view that Seattle’s new minimum wage is in line with historical norms, and is not extravagantly high.
In either case, we will have evidence in a few years on the impact of Seattle’s law.
Two final notes. First, by the time Seattle’s minimum wage law takes full effect in 2021, the real purchasing power of the minimum wage will most likely be about $13.00, due to inflation between now and 2021. Second, after I had thought about this for a while and written most of this post, I discovered a column that makes a similar argument to mine, and goes into a little more detail. It can be found here.