Home » Common Cents » Currently Reading:

Inflation Indexing Helps to Maintain a Strong Minimum Wage

It has now been more than five years since New Hampshire last increased its minimum wage. Over those five years, inflation has eaten away at the wage’s real purchasing power, reducing it by close to 75 cents per hour. Stretched out over a full-time work week, that’s nearly a full tank of gas, lost to inflation. Stretched out over a month, it’s like having your groceries vanish before you get to the car.

Real Value of NH Minimum Wage Low and FallingOne way to halt this form of wage erosion and to preserve the real purchasing power of the minimum wage over time is to adjust it automatically each year to keep up with the cost of living. Legislation (HB 1403) approved by the New Hampshire House of Representatives last week would do just that, raising the minimum wage in two steps to $9.00 per hour and then, beginning in 2017, requiring annual cost of living adjustments.

Eleven states now follow this practice, also known as “inflation indexing.” Washington was the first state to adopt indexing, in 2001, and New Jersey was the most recent, enacting a ballot initiative to require the practice this past fall. Here in New England, Vermont indexes its minimum wage to inflation; as a result, its wage standard rose to $8.73 at the start of 2014 and will likely climb to $9.10 by 2016. Nevada, Arizona, Florida, and Montana are among the other states that provide annual cost of living increases.

Those states that do use inflation indexing typically tie their minimum wages to one of two measures of inflation: the Consumer Price Index for All Urban Consumers (CPI-U) or the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-U, which HB 1403 would employ, is the broader of the two, reflecting the experience of 87 percent of the U.S. population, while the CPI-W covers just 32 percent.

A number of different laws in New Hampshire are already tied to inflation. For instance, the formula that determines state aid to local school districts relies upon a more specialized version of the CPI-U. Similarly, due to legislation enacted in 2012, the threshold at which businesses begin to owe the Business Enterprise Tax (BET) will now rise every two years to account for inflation, as measured by the CPI-U for the Northeast Region, so that fewer small companies will have to pay the tax over time.

Under federal law, multiple provisions of the tax code have been adjusted for inflation since the mid-1980s in order to prevent “bracket creep,” and Social Security benefits have been adjusted for inflation each year since 1975.

Inflation indexing is a tried and tested public policy. Applying it to New Hampshire’s minimum wage will be essential if the Granite State is to make sustained progress in ensuring workers receive a fair day’s pay for a hard day’s work.

Connect with NHFPI

Common Cents Blog

Committee of Conference Keeps Medicaid Reimbursement Rate Increases, Boosts Fiscal Disparity Aid in Final Budget Agreement

24 Jun 2019

tree with coins

Negotiators from the House and Senate agreed to a final budget proposal in the Committee of Conference for House Bill 1 and House Bill 2 last week, preserving many Senate proposals while incorporating additional education aid and removing the paid family and medical leave proposal supported by both the House and the Senate in their respective versions of the State Budget. The Committee of Conference budget proposal does not include the expansion of the Interest and Dividends Tax to include capital gains as proposed by the House, but freezes business tax rates at 2018 levels. The proposal retains the Senate’s $17.5 million appropriation for a new secure psychiatric facility and $40 million in revenue sharing to municipal governments during the biennium.