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America's Skimpy Minimum Wage

January 4, 2012 ·

Had the federal minimum wage risen at the same pace as the earnings of the highest-paid Americans, it would now be $26.96 an hour.

In 2012, the 63 million Americans who depend on Social Security are getting their first cost-of-living adjustment (COLA) in three years: a 3.6 percent increase in benefits. In other words, one in five Americans are getting a raise. For the average beneficiary, this amounts to an extra $38.95 a month.

That's not much, but it's something.

The federal minimum wage is staying put in 2012. For workers earning the federal minimum wage, the COLA for 2012 is…zero. Washington raised the minimum wage to $7.25 on July 24, 2009, and there it stands. There's no regular COLA for the federal minimum wage. (Eight states, which set their own minimum wages slightly higher than the federal level, are raising them in 2012.)

COLAs are necessary because inflation constantly changes the dollar's value. A dollar today isn't worth the same as a dollar yesterday. The year-to-year changes are small, but over time they add up. The Bureau of Labor Statistics estimates that it costs $4.58 today to buy what a buck bought in 1974.

Because of inflation, payments for government benefits can't be set once for all. Most federal programs have some kind of built-in mechanism to update dollar amounts for inflation. For Social Security, benefits have been indexed to changes in the Consumer Price Index (CPI) since 1974.

No Adjustment System

While federal benefit programs like Social Security are indexed for inflation, the federal minimum wage isn't. It only gets adjusted whenever Congress and the White House get around to it. As a result, the minimum wage has only increased seven times in the past 30 years.

Back in 1974, when COLAs for Social Security were first indexed for inflation, the federal minimum wage was $2 an hour. If the minimum wage had also been indexed to the CPI, the inflation-adjusted minimum wage today would be $9.16 an hour.

If the federal minimum wage had been updated since 1974 using the Social Security yardstick, it would now stand at $10.74 an hour.

In other words, after adjusting for inflation minimum wage workers today are paid less — about 26 percent less — than they were in 1974.

But that's not the end of the story. The Social Security COLA is an adjustment made for people who are already receiving benefits. People's benefit levels are determined at the point of retirement by the average wages they earned over the course of their working lives.

Because of inflation, it's not fair to lump wages earned in the 1970s with wages earned in the 2000s. The earlier wages have to be adjusted to make them comparable with recent wages. But the Social Security Administration doesn't use the CPI for this purpose. It uses something called the Average Wage Index (AWI).

The AWI is exactly what it sounds like. It's an index of the average wages paid in any given year. Because wages tend to go up faster than inflation, the AWI goes up faster than the CPI.

The Social Security Administration uses the AWI instead of the CPI because the CPI doesn't capture changes in living standards over time. The CPI adjusts for changes in the cost of living, but it doesn't adjust for changes in the quality of life. Simply put, we expect people to live better in 2012 than they did in 1974.

How about $10.74 per Hour? $14.41? $26.96?

If the federal minimum wage had been updated since 1974 using the Social Security AWI, it would now stand at $10.74 an hour. That's quite a bit more than the $9.16 an hour it would be if it had been updated for inflation using the CPI. It's a whole lot more than today's $7.25 an hour federal minimum wage.

A very strong case can be made for a $10.74 minimum wage, which is only 50 cents higher than San Francisco's CPI-adjusted minimum wage.

But that's not the end of the story. The Social Security AWI is based on the changes in people's average annual wages over time. Wages, however, have not kept pace with rising economic prosperity.

Since the 1970s ordinary workers' wages have failed to rise along with the economy as a whole. The massive rise in non-wage income (dividends, interest, and capital gains) has made workers' wages a smaller and smaller slice of the overall pie. America's total personal income per capita — including income from all sources — has risen much faster than the Social Security AWI.

Between 1974 and 2011 the AWI rose a cumulative 17 percent (adjusted for inflation). Per capita personal income, on the other hand, rose 57 percent (adjusted for inflation). Had the minimum wage been indexed to per capita personal income growth starting in 1974, the minimum wage today would be $14.41 an hour.

That's a far cry from $7.25.

By today's standards $14.41 an hour might sound like a lot for a minimum wage, but it doesn't have to stop there. At the top 1 percent of the American income distribution, average incomes rose 194 percent between 1974 and 2011. Had U.S. minimum wages risen at the same pace as U.S. maximum wages, the minimum wage would now be $26.96 an hour.

The difference between $7.25 an hour and $26.96 an hour shows just how much inequality has increased in America over the past four decades.

An Inequality Indicator

Inequality has risen across the developed world in recent years, but nowhere as much as in the United States. Incomes are higher for the top 1 percent in America than anywhere else in the world. And the rest of the world's developed countries in turn have much higher minimum wages.

In Canada, the minimum wage is between 9 and 11 Canadian dollars, depending on the province or territory. That's between $8.59 and $10.50 in U.S. dollars. These figures and the figures below are based on average exchange rates for the three year period 2009-2011.

In the United Kingdom, the minimum wage is £6.08, or about $9.56. In France, it's €9.19, or about $12.44. In Australia, the statutory minimum is A$15.51, or about $14.20, but very few workers earn so little. The standard wage for fast food and other service jobs is A$17.03, or about $15.59.

In all these countries, minimum-wage work also includes benefits like paid sick days and government-sponsored universal health insurance.

So how high should the U.S. minimum wage be? It's currently $7.25. Adjusted for inflation using the CPI it would be $9.16. Adjusted for wage growth using the AWI it would be $10.74, similar to the minimum wages found in other countries.

On the other hand, if the minimum wage had grown along with personal income overall, it would now be $14.41. That would put us on the high end of international comparisons. Once upon a time, America was always on the high end of international comparisons. Maybe someday we'll get there again.

Salvatore Babones is a senior lecturer in sociology and social policy at the University of Sydney and an associate fellow at the Institute for Policy Studies. An earlier version of this post appeared on the inequality.org website. www.ips-dc.org