Make Social Security the model to fix the minimum wage

Kathryn Anne Edwards, Tribune News Service

One of the few things Democrats and Republicans agree on these days is that it’s past time to raise the federal minimum wage, which has been stuck at $7.25 an hour for 15 years. Vice President Kamala Harris supported President Joe Biden’s effort at the beginning of his administration to increase it to $15. Donald Trump’s running mate, Ohio Senator JD Vance, supports Republican legislation to raise it to $11.  Neither side is making a politically risky bet here, as raising the minimum wage is very popular policy. Of the 28 times referendums to raise it were on the ballot in statewide elections since 1996, they passed 26 times (the two losses were both in 1996). More than 75% of Americans think the current rate is too low, and the majority support a minimum wage of at least $15, with many supporting a floor of at least $20.

The debate often neglects a critical part, which is whether and how to index the wage to some benchmark so that it updates automatically. Many would assume something pegged to inflation would be a victory. In fact, it would be a little underhanded. A better model would be how we calculate Social Security benefits.  Most of the discussion focuses on what the minimum should be increased to. One idea would be to make it a percentage of the median wage. Before the start of the century, the inflation-adjusted minimum wage was about 50% of the median, peaking at 57%. That suggests it should be $12 to $13 now. Another idea is to make it some percentage of the average wage of production and non-supervisory workers, a category that excludes most managers. By that measure, the minimum wage used to be about 42%, peaking at 53%, suggesting it should be $12.50 to $14.50.

The problem with those approaches is that they fail to recognize that the bottom and middle of the labour market are simply not the same from a wage -setting perspective, and they don’t fare the same in recessions or in tight labor markets. Rather than link the minimum wage to the middle, link it to the bottom. Here, the minimum wage has been about 80% of the 20th percentile wage, peaking at 90%. That suggests the minimum wage should be $13 to $14.50.

Yet another idea is to think of the minimum wage as a way to guarantee some minimum standard of living. To keep a family of four out of poverty based on official thresholds, it would need to be just under $15. To provide a living wage, or one to afford basic necessities such as housing, transportation, health care, food and utilities, it would have to be much higher. Even a single-person household in Mississippi, a relatively low-cost state, would need $20 an hour in that case. Hence, a meaningful floor would put the minimum to at least $12, but ideally closer to $15. A standard-of-living floor requires at least $15 and up to $20. (It speaks to just how much the minimum wage has been neglected that the current rate of $7.25 can fit within the range of what the increase should be.)

Whatever number Congress might land on, it’s even more important that the new minimum wage be indexed. It has always been set in nominal terms; its peak value is the first day it is in effect and then slowly erodes over time as it loses value relative to rising prices. Rather than wait for Congress to update it, indexing automatically increases the wage.

This is where the stakes get high.

The default assumption would be to index the wage to inflation so that it grows with prices. Although the Republicans’ Higher Wages for American Workers Act proposes a paltry increase to $11 by 2028, it does include an automatic price adjustment every two years based on inflation. The problem is wages and prices don’t move in lockstep, so wages should be indexed with wages and prices indexed with prices. Why? Wages rise faster than prices. A nominal, or non-indexed, dollar amount can erode relative to prices, but a real, or price-indexed, dollar amount can erode relative to wages.

This is a lesson that policymakers know well — at least in theory. The official poverty threshold suffers from the price problem. It is based on a 1963 estimate of need that was adopted as the official threshold of poverty and increased each year based on the Consumer Price Index. Even though the threshold was updated, it still eroded. So low has this cutoff fallen that public programs now use multiples of poverty for eligibility, rather than poverty itself, and after 20 years of deliberating and advocating, poverty researchers have gotten an alternative measure of poverty into officialdom, and use this to actually measure poverty.

Social Security does not suffer from the price problem. When individuals apply, their highest 35 years of earnings are averaged to form the basis of their benefit calculation. The older earnings are adjusted into today’s dollars using a wage index, not a price index. And each year, Social Security’s tax cap is increased using that same wage index.

The labor market offers a lot of natural suggestions for how to set the minimum wage, and whether it’s $12 or $15 or $20 really depends on how it’s conceptualized, whether it should reflect labor market trends or sets them, and whether it’s truly minimal or aspirational. But there is no nuance to the choice of index. Pegging the minimum wage to prices is another way for it to erode; it’s making the same mistake a different way. Policymakers know not to make that mistake for Social Security, and they should apply the lesson to the minimum wage.