Has Inflation Shrunk the Minimum Wage?

Economists argue over whether inflation has shrunk the minimum wage, and they never seem to resolve the issue. Here we have the argument over money and inflation simplified.

(Photo Credit: Images_of_Money/Flickr)

Inflation simply refers to the often gradual increase in prices for all goods and services that cause the value of any dollar to go down. Take a quick look at the U.S. Inflation Calculator and you will see that inflation has gone up and down over the years. In 2013, inflation has been creeping up at a rate of 1 – 2 percent per month.

The logic behind claiming that inflation shrinks the minimum wage is that inflation shrinks the value of money. Nobody can buy a loaf of break for nickel anymore. If your wages stagnate and inflation rises, the value of your wage is less. For more information, see The PayScale Real Wage Index, which shows that real wages have dropped since 2006. 

Minimum Wages

We certainly don’t increase the minimum wage by 1 -2 percent each month, nor do we decrease wages if prices for goods and services generally fall. (Yes, sometimes inflation goes down.)

It is also true that as inflation rises over the years, minimum wages do not.

Earned Income Tax Credit

Time’s Christopher Matthews claims that inflation shrinking the minimum wage is a myth. He uses the logic that the Earned Income Tax Credit (EITC) makes up for any gaps between the rise of prices and the rise (or lack thereof) of wages.

Some economists argue that the EITC plus minimum wage together helps low-income, working families make ends meet. They also argue that, unlike the minimum wage, the EITC helps the people it was designed to help.

People from wealthy families may take minimum wage jobs. A common example is the young person saving money for college. Inflation most certainly has decreased the value of this kid’s earned income. When the cost of a textbook goes up from $80 to $100, and you are still making the same $8 per hour, your wage is arguably smaller.

The EITC is only available to those who are in low-income families. The savings on taxes may make up for the shrunken dollar by allowing the working poor to keep more of those dollars.

Has Inflation Shrunk the Minimum Wage?

To say that the existence of the EITC prevents inflation from shrinking the minimum wage is not entirely true. Inflation has shrunk the minimum wage. The EITC is a safety net to keep the working poor out of abject poverty.

Tell Us What You Think

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