Big COLAs in State Minimum Wages Kick in

During the long and tranquil period for inflation that ended with COVID, 18 states passed legislation requiring employers to pay a minimum wage that automatically increases every year to protect their lowest-income workers from inflation.

With inflation surging to 7 percent in 2021 and running even higher this year, the cost-of-living increases are paying up.

Many state minimum wages are now 1 1/2 to 2 times the federal minimum wage, with another round of increases coming in January 2023. Congress, on the other hand, hasn’t increased the $7.25 hourly federal wage since 2009, widening the disparities between the states that tie their minimum wages to the federal level and the states that routinely raise theirs to keep up with inflation.

The federal minimum wage of $7.25 is in effect in Indiana, Idaho, Iowa, Georgia, Kansas, Kentucky, New Hampshire, North Dakota, Oklahoma, Pennsylvania, Texas, Utah, Wisconsin, and Wyoming. For a full-time worker, that adds up to about $15,000 per year or barely above the federal poverty line, though many employers are paying more to compete for workers in the midst of a labor shortage.

The Economic Policy Institute (EPI) estimates that the value of the federal minimum has fallen 12 percent just in the past two years of unusually high price increases. That’s on top of a decade in which the federal wage was sharply eroded by modest inflation year after year.

“These inflation-driven cuts can snowball quickly,” the EPI said in a recent report. “Faster inflation makes it more important, not less, to raise the federal minimum wage.”

Most of the states with legislation on the books to automatically increase their minimum wages had done so well before COVID supply constraints caused inflation to kick up.

Washington, which began indexing its wage in 2020, has the highest state minimum wage, and it will increase by 8.6 percent increase to $15.74 on Jan. 1. In California, the minimum wage will rise to $15.50 an hour for employers with 25 or fewer workers – a 19 percent increase over a two-year period that will bring them into parity with the wage requirement for larger employers. Many other states have scheduled increases to $15 in the next few years.

Ohio was one of the first states, in 2006, to institute cost-of-living increases based on the Consumer Price Index. But its wage is one of the lowest among the states with annual increases and will rise 8.6 percent in January to $10.10 per hour. Maine will have an 8.2 percent increase to $13.80; and Maryland: a 4.9 percent increase, to $12.80 an hour for employers with less than 15 workers and a        6 percent rise to $13.25 for larger employers.

A few cities also approved automatic inflation adjustments. Last July, Washington, D.C.’s minimum increased 5.9 percent to $16.10 an hour, and Minneapolis’s wage for employers with 100 or fewer workers will increase 7.4 percent next July to $14.50, matching the minimum wage for the city’s large employers in July 2024.

The shortage of workers in a tight labor market, especially for the least desirable jobs in industries like restaurants and healthcare, has driven up their pay more than it has for high-paid workers.

Nevertheless, these workers continue to struggle at the bottom of the pay scale. The inflation adjustments to the minimum wages, combined with the tight labor market, should improve their lot.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  This blog is supported by the Center for Retirement Research at Boston College.