The Federal Minimum Wage: Indexation (CRS Report for Congress)
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| Release Date |
Oct. 26, 2016 |
| Report Number |
R44667 |
| Report Type |
Report |
| Authors |
David H. Bradley Specialist in Labor Economics |
| Source Agency |
Congressional Research Service |
Summary:
In 1938, the Fair Labor Standards Act (FLSA) established a federal minimum wage of $0.25 per hour. The minimum wage provisions of the FLSA have been amended numerous times since then, typically for the purpose of expanding coverage or raising the wage rate. Since its establishment, the minimum wage rate has been raised 22 separate times, most recently in 2007-2009 when it was increased from $5.15 per hour to its current rate of $7.25 per hour in three steps.
The federal minimum wage changes only when Congress amends the FLSA. Since 1938, Congress has amended the FLSA to raise the minimum wage 10 times for a total of 22 rate increases, with periods between increases ranging from 1 to 10 years. An alternative to periodically amending the FLSA to increase the minimum wage would be to index, or link, the federal minimum wage to another variable so that the minimum wage changes automatically when the other variable changes. Indexing the minimum wage provides regular adjustments to and reduces the volatility of minimum wage rates, maintains the relative value of the minimum wage to other economic indicators (e.g., prices), and decouples rate changes from other policy considerations. On the other hand, indexation may also reduce regular oversight of minimum wage changes because it automatically adjusts the rate and changes one part of the FLSA while leaving other parts of the act unchanged subject to congressional action. Although Congress has considered indexing the federal minimum wage at various points, it has not done so.
The most common proposed indices for the minimum wage include different versions of the Consumer Price Index, personal consumption expenditures, employment costs, and hourly earnings. Based on a review of seven possible indices and a simulation of federal minimum wage rates under different indices, the minimum wage in 2016 would have been highest had it been indexed to average hourly earnings and lowest had it been indexed to personal consumption expenditures. Linking the value of the federal minimum wage to consumer prices would have generally resulted in minimum wages higher than the current rate, depending on the starting point.
Currently, 17 states and the District of Columbia index (or have enacted laws that will in the future) their state minimum wages to some economic measure. In addition, indexation is used in some federal entitlement programs, such as Social Security and Supplemental Nutrition Assistance Program (SNAP) benefits, as well as in other federal wage regulations, such as the minimum wage for employees on certain federal contracts. Most of the numerous proposals in recent Congresses to increase the minimum wage would combine a series of nominal rate increases, followed by indexation to a consumer price index.
