The upside (and downside) of an automatic raise

Adrian Ma Jan 10, 2019
Fantasia Pettis, 25, works at a Subway franchise in Cleveland, where she makes Ohio’s minimum wage, $8.55 per hour. “It’s a struggle,” she said when asked if she's getting by. Adrian Ma/Marketplace

The upside (and downside) of an automatic raise

Adrian Ma Jan 10, 2019
Fantasia Pettis, 25, works at a Subway franchise in Cleveland, where she makes Ohio’s minimum wage, $8.55 per hour. “It’s a struggle,” she said when asked if she's getting by. Adrian Ma/Marketplace

This month, thousands of U.S. workers will get a raise in their paychecks — even though they didn’t ask for it.

That’s because eight states have laws that automatically increased their minimum wage in order to keep up with inflation. They include Alaska, Florida, Minnesota and Ohio, according to the National Conference of State Legislatures.

Because these state laws use the consumer price index as a key determinant in their minimum wage formulas, this practice is often called “indexing.”

“If the cost of groceries, gasoline, housing, goes up by X percent, the minimum wage that following year is going to go up by that same percent,” said Ben Zipperer, an economist at the progressive Economic Policy Institute.

The goal of indexing, Zipperer said, is to prevent workers at the lowest end of the income spectrum from falling behind as the cost of living rises.

“I feel like it’s still not enough,” said Fantasia Pettis, who makes Ohio’s minimum wage working at a Subway sandwich shop in Cleveland.

On Jan. 1, Ohio’s minimum wage was automatically raised from $8.30 per hour to $8.55 per hour for workers who aren’t tipped. For tipped workers, the base wage was increased from $4.15 to $4.30 per hour thanks to a state constitutional amendment passed in 2006

Assuming a 40-hour workweek, this year’s 25 cent raise adds up to approximately $43.33 per month before taxes for Pettis. Asked whether she feels she is getting by on her current income, Pettis shrugged and said “barely.” “Minimum wage,” she said, “it’s a struggle.”

Not only does she have trouble meeting basic expenses, Pettis said, those basics are getting more expensive. According to the Bureau of Labor Statistics, the consumer price index increased about 2.2 percent between November 2017 and November 2018.

Still, Zipperer said, a law that essentially guarantees a yearly cost-of-living raise may be better than leaving it up to state or federal legislatures, which he argued may be too slow to respond to inflation each year.

“Tying these increases so that there’s some kind of automatic process makes them much more predictable,” Zipperer said. “Between the late 1930s and late 1960s, there were enough increases in the [federal] minimum wage that it was tracking inflation,” he said. “Then, after the late 1960s, minimum wage increases became much less frequent and smaller. … As a result, the value of the minimum wage relative to everything in our economy has fallen.”

Indeed, the federal minimum wage has been stuck at $7.25 since 2009.

“The minimum wage is going to keep on increasing, and we should try to keep it up with the cost of living,” said Alex Gleason, manager of a bar on Cleveland’s west side called the Old Angle Tavern.

Gleason said he currently pays his employees more than Ohio’s minimum wage, so if the wage floor only increases a couple of percent every year, it will be a while before his business feels any pressure. His bigger concern, he said, are the calls for a $15 minimum wage at the state and federal levels.

“It’s a very low-profit-margin business,” Gleason, said, “so that would be a big deal for some businesses that are barely getting by.”

A wage hike that large could also hurt employees, said Aparna Mathur, a resident scholar at the conservative American Enterprise Institute.

“You could find those employers are now less likely to hire new minimum wage workers,” Mathur said, “or they’re less likely to keep existing workers on the job.” Or employers might decide it will cost less in the long run to replace those workers with machines. A better way to help lower-income workers, Mathur said, would be to expand the earned income tax credit.

All that said, if inflation stays relatively low, around 2 or 3 percent, Mathur said “employers can offset some of those hikes by passing on the cost to consumers; the employment effects are likely to be minimal.”

While an indexed minimum wage can help prevent low-wage workers from losing a certain standard of living, Zipperer, from the Economic Policy Institute, said these policies don’t address a more fundamental question: What if the minimum wage, even with yearly increases, is insufficient for a person to live on?

For instance, according to MIT’s Living Wage Calculator, a single adult in Ohio needs to earn about $10.47 per hour to stay just above the poverty line. Currently, the state’s minimum wage of $8.55 is nearly $2 short of that.

“If you don’t raise the minimum wage to an appropriate level to begin with,” Zipperer said, “indexing kind of locks it in to that level.”

Nevertheless, several states in the coming years are planning to adopt indexing. 

Correction (Jan. 14, 2019): An earlier audio introduction of this story misstated the name of an organization. The audio has been updated.

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