If State Lawmakers Favor Gradually Phasing in the Minimum Wage, They Should Love Indexing it to Inflation

The legislature’s decision to extend until 2018 the phase-in period for raising the minimum wage to $10.10 will needlessly delay a boost in earnings for Maryland’s workers and demonstrates why automatic increases based on inflation are the right way to ensure that the minimum wage keeps pace with the cost of living in the future.

As we have argued before, the minimum wage is too important to too many workers to leave at the mercy of the periodic whims of lawmakers. Even slight inflation steadily erodes the value of the minimum wage relative to the cost of food, housing, and other necessities, so workers continue to fall behind until lawmakers agree to increase the minimum wage, often at a lower level relative to the cost of living. 

Sources: Minimum wage data: Maryland Department of Labor, Licensing, and Regulation, "History of Minimum Wage in Maryland," February 22, 2010,https://www.dllr.state.md.us/labor/wages/minwagehistory.shtml; Inflation data: Bureau of Labor Statistics CPI inflation calculator, http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2014

A predictable, gradual, and - most importantly – continuous increase in the minimum wage would fix that. Tying  the minimum wage to inflation, known as indexing, would also benefit businesses, since they would know in advance when the minimum wage is going  up and by how much, improving their ability to plan.

Maryland would not be treading new ground by instituting indexing. Eleven states already tie their minimum wage to inflation.  President Obama has pointed out that indexing the federal minimum wage is something that he and Governor Romney  agreed on during the 2012 election, and opinion polls consistently show that doing so is popular. In addition, indexing is already used in a variety of other policies, including determining Social Security benefits and the amount of assets that are subject to the estate tax. If lawmakers are willing to tie exemptions from the estate tax for millionaires to increases in inflation, they should be willing to allow the same for workers’ wages.

Advocates of raising the minimum wage have secured an important – though needlessly drawn out – victory in Maryland and t is important to continue to build on this momentum. They should continue to push lawmakers to index the wage to inflation, rather than waiting for it to inevitably lose its purchasing power over time, requiring yet another campaign to raise it in the future. The best way to capitalize on the current victory is to push for a more lasting one.

Putting the Issue to Rest – Why Automatic Minimum Wage Increases Make Sense

Raising Maryland’s minimum wage to $10.10 an hour is vital to the state’s economic prospects, but – as legislation proposed in Annapolis shows – that’s only half the battle.

In addition to raising the hourly wage rate, HB 295/SB 331 would require the state to annually increase the minimum wage based on the growth in the Consumer Price Index, a measure of inflation. This would address an important problem: the purchasing power of the wage decreases over time as prices increase, and periodic increases at unpredictable intervals adopted by the legislature tend to lag far behind the need. The legislation now being considered in Annapolis would not only raise the wage to catch up to  the price increases of recent years, but provide a way for the minimum wage to keep up with increasing costs in future years as well, without requiring additional legislative action.

Doing so makes sense. Given how important the minimum wage is,  it’s crucial that it  keep up with the cost of necessities. Today, 10 states have this automatic provision. In addition to being fairer to low-wage workers, this also makes the minimum wage consistent with programs intended to help low-income families maintain basic living standards.  For example, Social Security beneficiaries receive periodic Cost of Living Adjustments (COLAs) based on inflation. 

Sources: Minimum wage data: Maryland Department of Labor, Licensing, and Regulation, "History of Minimum Wage in Maryland," February 22, 2010, https://www.dllr.state.md.us/labor/wages/minwagehistory.shtml; Inflation data: Bureau of Labor Statistics CPI inflation calculator, http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2014

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Worse still, these periodic increases in the minimum wage do not necessarily respond adequately to increasing prices. As the chart above shows, sometimes lawmakers increase the minimum wage to a value less than what the wage would be had it automatically kept up with inflation. Tying the minimum wage to inflation  would make sure that not only is the minimum wage increased regularly and predictably, but also at an amount that matches the increase in prices.

This helps not only working men and women, but businesses too. First, indexing the minimum wage would give employers more certainty about labor costs. Second, it would help the low-wage customers of businesses better able to afford what the business makes or sells.

Tying automatic minimum wage increases to inflation would take the politics out of what ought to be an economic issue instead. Then, policymakers could focus more on other important issues crucial to Maryland residents’ economic well-being, like access to affordable health coverage, high housing costs, and student loan debt. While raising the minimum wage is a necessary start, additional policies are needed to address poverty and inequality.

The Week Ahead

Last week we blogged about sales tax modernization strategies for Maryland and posted about the realities of personal budgeting for low-wage workers in the state.

The Bureau of Labor Statistics issued a number of economic news releases last week. Its earnings report shows that the seasonally adjusted median weekly earnings in the second quarter of 2013 were $775, up a minor $6 from the previous quarter. The Employment Cost Index figures for the three-month period ending in March of this year indicate overall compensation levels for civilian workers were steady from the previous period, with wages increasing by 0.5 percent and benefit costs decreasing 0.1 percent. The Consumer Price Index report for June lists the CPI as having increased a half of a percent last month, with the increases in gas prices accounting for the majority of this change.The index for non-food and non-energy goods increased by 0.2 percent, staying level with the figures for May. The preliminary multifactor productivity trends analysis (which measures the change in output per unit of combined capital and labor input) for 2012 states that productivity in the private nonfarm business sector increased at a 0.9 percent annual rate last year, which is the same annual rate the nation experienced from 1987 to 2012. The unemployment numbers reported the state's unemployment rate increased by 0.3 percentage points in June to 7 percent. The private sector added over 6,000 jobs last month, reaching the highest employment level for the sector since June of 2008. Government jobs decreased by nearly 2,000 jobs during that period. Maryland's unemployment levels still remain below the national average of 7.6 percent.

Also last week, the Maryland State Retirement Retirement and Pension System published a press release proclaiming their investment portfolio earned a 10.6 percent return last fiscal year. This achievement went well beyond the state's target of 7.75 percent.

For the week of July 22nd through the 28th:

• On Wednesday, July 24th, the Board of Public Works will hold a general meeting at 10am in the Assembly Room of the Goldstein Treasury Building at 80 Calvert Street in Annapolis.
• Later on Wednesday,  Progressive Maryland, Common Cause, and Delegate Mary Washington are hosting a joint event, screening Bill Moyers' acclaimed film "The United States of ALEC" at the Baltimore County Public Library at 320 York Road in Towson. The documentary details the activities of the American Legislative Exchange Council, a group of corporate lobbyists who author "model legislation" that attacks labor rights and promoting corporate interests and privatization, to be used by member legislators in their home states. Following the screening, there will be a discussion. Directions and RSVP information is available here.
• On Thursday, July 25 the Special Joint Committee on Public Safety and Security in State and Local Correctional Facilities will conduct a site visit to the Baltimore City Detention Center at 10am.
• Later on Thursday, the Maryland Medicaid Advisory Committee will meet from 1pm to 3pm at the Department of Health and Mental Hygiene's lobby level conference room L-3 at 201 W. Preston Street in Baltimore. The agenda is to be announced.