You would hardly know it from the news coverage, but America has a historically high minimum wage. At the Heritage Foundation we just put out a report looking at how the minimum wage has changed over time. It currently stands at $7.25 an hour, with many states having higher rates. Since 1950, the minimum wage has averaged $6.62 an hour (in 2013 dollars). It peaked in 1968 at $8.28 an hour.
Liberals do not see it this way. They argue the inflation-adjusted minimum wage was above $10 in the late 1960s, and raising it to that level would simply restore it to its previous value. President Obama now supports Senate Democrats’ proposal to hike the minimum wage to $10.10 an hour.
Where does this disagreement over basic facts come from? The government produces several different measures of inflation. Liberals use the Consumer Price Index (CPI) for their calculations and conclude the minimum wage stood at $10.60 an hour in 1968. However, economists have long recognized that the CPI overstates inflation rates. Among other problems, it inadequately accounts for product-quality improvements and changing consumption patterns. In the short term, these errors are small. Compounded over decades, they make a huge difference.
Consequently the CBO and the Federal Reserve prefer a different measure of inflation, the Personal Consumption Expenditures (PCE) deflator. The PCE better accounts for changing consumption patterns (as does a variant of the CPI, the chained CPI). While the PCE also overstates inflation, it is much more accurate than the CPI. The better measure shows the minimum wage has never hit the levels President Obama proposes:
The last minimum-wage increase occurred just four years ago, and America now has a historically high federal minimum wage. Raising the minimum wage to an unprecedented level in a weak economy with high youth unemployment is questionable at best.
— James Sherk is a senior policy analyst in labor economics at the Heritage Foundation.