Indexing minimum wage to CPI, a seemingly great progressive idea, may actually be regressive. Unless you think a $4.08/hr minimum wage (i.e. the inflation adjusted value today of the original minimum wage) is progressive, you should think again about inflation indexing of the minimum wage. We need a more progressive index factor than CPI. Here's why:
Assuming real GDP/capita and productivity are both increasing, and hours worked are not increasing, average wages must grow faster than inflation in order to maintain a constant labor share of income. Unless minimum wage grows at least as fast as the average wage, the minimum wage worker will have a decreasing relative standard of living. Thus, in a healthy economy, unless the minimum wage grows faster than inflation, the minimum wage worker will experience a declining relative standard of living.
Now, theoretically, we can manually increment the minimum wage legislatively at any time. And from 1938 to 1968 we did so at a rate that maintained pace with GDP/capita. However, it has gotten politically more difficult to do so, such that the minimum wage today is less than if it had been inflation indexed in 1968. Thus it seems progressive to advocate indexing to inflation. However, while less regressive than the preceding 45 years of federal minimum wage history, it is still regressive. To understand this, consider that if the original 1938 law had inflation indexed the minimum wage, and no manual increments were thereafter made, the minimum wage today would be just $4.08 per hour. It is because of 30 years of progressive increases in the minimum wage, up until 1968, that the minimum wage is still greater than $4.08/hr despite 45 years subsequent years of regressive policy.
More after the fold:
If we index to inflation, we perpetuate exactly that same sinking relative standard of living in the future. How much harder politically will it be to get an increase in the minimum wage when it is already indexed? But what is the progressive alternative?
As most of you are no doubt aware, today's minimum wage of $7.25 is slightly less after inflation than in 1950 and is just 67% (after inflation) of the minimum wage in 1968. If expressed as a percentage of the average wage the minimum wage has fallen from 54% in 1968 to just 36% in July of 2013. Because the average wage has also not grown with productivity, inflation indexing would have almost maintained the relationship between minimum and average wages over the period from 1968 onward.
However, a progressive stance would advocate a path for wages which returned to the relationship between 1938 and 1968, when wages tracked with productivity and GDP/capita. As Elizabeth Warren notes, had the minimum wage continued to increase with productivity, it would now be $22/hr. That is clearly not a feasible level tomorrow, or even next year. However, it goes a long way to explaining intuitively, just how far income concentration has gone.
My progressive policy recommendation for the minimum wage: Raise it over a period of a few years to match the inflation adjusted value of 1968 (say $1/yr for 4 years). Then index it, not to CPI or another inflation measure, but to some more progressive value. Of course, there are any number of progressive ways to index, but my point here is simple, inflation indexing is not one of them.