INFLATION, STATE MINIMUM WAGES, AND EMPLOYERS’ SISYPHIAN ROCK

Earlier this month, the U.S. Department of Labor’s Bureau of Labor Statistics reported that, in May 2022, the rate of inflation reached 8.6 percent – the highest rate in over 40 years. Though unwelcome, the report was hardly surprising. Businesses and consumers alike have seen the cost of almost everything rising since 2021. The BLS’s report was an unhappy indicator that – for the foreseeable future – costs will likely continue to rise. But something few analysts commented upon was the fact that the BLS’s report is not just a reflection of increased market costs which occurred in the past. In many states and localities, the BLS’s report will mandate increased costs as a matter of law in the future.

The “inflation” the BLS’s report refers to is the “Consumer Price Index for All Urban Consumers” or CPI-U.  That index is a measure of the average change over time in the prices paid by urban consumers for a “market basket” of different consumer goods and services – in this case the change in prices over the preceding twelve months. In other words, the May CPI-U report compares the average prices of different goods and services in the market in May 2022 to the average prices of those same goods and services in May 2021.  So how could a report of average price increases in the open market legally mandate increased costs in the future?

The answer is certain state and local minimum wage laws. Frustrated by the perception that the cost of living frequently outpaced the minimum wage paid to employees, at least 18 states[1] the District of Columbia, and a number of municipalities have adopted minimum wage laws that tie their mandated minimum wage to the rate of inflation. The idea was straightforward: if the cost of goods and services to consumers (i.e. employees) rose, so would the required minimum wage paid to those employees. In many of those states, the CPI-U is the index to which the minimum wage is tied.  Thus, a higher CPI-U means a higher minimum wage in these states and locales.

In the past, those minimum wage increases were relatively modest because inflation was relatively low.  Between 2012 and 2020, inflation as measured by the CPI-U was between .7 percent and 2.3 percent.  Thus, assuming a baseline $10.00 per hour minimum wage, the increased hourly minimum wage rates would have increased to between $10.07 and $10.23 per hour over the course of the year.  Not insignificant, but not dramatic.

However, if the current record inflation in the CPI-U continues to increase, come 2023, the minimum wages in these states will increase accordingly.  And that will cause an increase in costs across the board.  Why? For most businesses, one of the largest costs of doing business is employee wages. And as any business owner can attest, an increase in the minimum wage rate does not only affect the wages of those making at or near minimum wage; it often pushes the wages of all employees higher.  Take the person who has worked for two years and is making a dollar more an hour than the newest hire, who makes just minimum wage.  If the state minimum wage requires a one dollar increase in the wages of the new hire, the two-year veteran will demand a similar raise, as will the four-year employee above them, and so on.  A rising tide, as the saying goes, raises all boats.

But because the largest cost to most employers is employee wages, increased employee wages lead to increased costs for goods and services.  Which, in turn, raises the cost of living as measured by – wait for it – the CPI-U.  Thus, a positive feedback loop begins which cannot easily be reined in.  The conventional economic wisdom is that persistent inflation will eventually raise prices to a point where many consumers cannot afford the good or service, thereby causing a decrease in demand.  The lack of demand, in turn, cools the economy and eventually brings down inflation. Yet, state laws tied to inflation are drafted as a “one-way ratchet” – an increase in inflation can increase minimum wages; but deflation cannot reduce them.[2] While it remains to be seen how this will play out in practice, there is at least a chance that state minimum wage laws indexed to inflation may keep prices artificially high despite a cooling economy.

State minimum wage laws tied to inflation are hardly the only contributor to increased wages.  Some states have laws phasing-in a higher minimum wage that locks-in annual increases until the minimum wage reaches a certain level.  And employers across the country have been forced to pay more in wages to attract workers in a historically tight labor market. Thus, for some employers, the market has already set wages well-above state mandated minimum wages.  But in some sectors, tight margins mean that state minimum wages are a meaningful factor in determining what employees can and must be paid.

Employers in these states may feel like the legendary Sisyphus of Greek mythology; doomed to continually roll a gargantuan rock up a mountain each day, only to have it roll to the bottom when he neared the top. Over the last year, many employers have raised hourly wages significantly, hoping to both attract new talent and stay abreast of state minimum wage mandates.  However, increases in state and local minimum wage laws tied to inflation, coupled with the shortage of workers in many markets, mean that yesterday’s generous wages are today’s entry-level pay.  Businesses in states with minimum wage rates tied to inflation should be thinking about 2023’s minimum wages now and planning accordingly.

 

[1] Alaska, Arizona, Colorado, Florida, Maine, Minnesota, Missouri, Montana, Nevada, New Jersey, New York, Ohio, Oregon, South Dakota, Vermont, Virginia, and Washington.
[2] Missouri appears to be the lone exception.

 

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.

Learn more aboutRex Fennessey
Rex represents employers in all facets of labor and employment law. He is widely recognized in the field of wage and hour litigation, and has represented clients in numerous class action and collective action lawsuits. He defends employers against discrimination claims in Federal and State courts and before administrative agencies.