Illinois Needs a $10 Minimum Wage Just to Keep Up With Inflation

Economists across the country have advocated for raising the minimum wage, claiming that the benefits outweigh the costs. For example, increasing the minimum wage has been found to boost consumer spending and reduce income inequality in the economy.

The federal minimum wage is $7.25 an hour and has not been increased since 2009. Though the federal rate has not increased in 7 years, many states and localities have raised their own minimum wages. Chicago raised its local minimum wage to $10.00 in 2015. By 2019, the City is expected to have a minimum wage of $13.00, per an ordinance passed by the City Council.

Some states have adopted a minimum wage policy that adjusts for inflation. Every year, most workers who are employed in hourly minimum wage jobs lose relative purchasing power since the wage is not indexed to inflation. A report by the Pew Research Center found that the federal minimum wage has lost approximately 8.1 percent of its purchasing power due to inflation.

15 states and the District of Columbia, however, have a minimum wage that is automatically adjusted each year to account for the rising price of goods and services. At the beginning of 2016, the minimum wage increased by between 5ȼ and $1 in these states plus D.C., resulting in raises for more than 4.6 million workers.

Indexing the minimum wage to inflation would benefit the population and economy of Illinois.

The Economic Policy Institute estimates that around 733,000 workers earn less than $10.10 in Illinois. If Illinois had a minimum wage that was pegged to inflation from 2010 to 2016, the minimum wage would have been $9.15 in 2016. A full-time minimum wage worker would have earned $1,872 more in 2016 with an inflation-adjusted minimum wage.

Interestingly, 51 out of 81 surveyed Ph.D. economists and public policy professors (63%) at accredited universities in Illinois in 2015 responded that the state’s minimum wage should be above $8.25 per hour. The average value suggested by the economics and policy experts was $9.45 per hour and the median was $10.00 an hour.

It is not too late to right the ship. The $9.15 inflation-adjusted minimum wage is also approaching the $10.00 an hour minimum wage studied and endorsed by the Illinois Economic Policy Institute (ILEPI) and University of Illinois at Urbana-Champaign in 2014.

Illinois should raise the state minimum wage to $10.00 and then index it to inflation.

Screen Shot 2016-02-02 at 9.55.46 AM
Note: 2016 is an estimate and assumes 2% inflation.

An Illinois resident working 40 hours a week, 52 weeks a year in a minimum wage occupation currently takes home $520 less than an equivalent Michigan worker and $1,560 less than a comparable Minnesota employee. With the current $8.25 per hour wage floor for adults, a minimum wage job pays a full-time employee $17,160 annually in Illinois. If the minimum wage was raised to $10.00 in 2017, a full-time employee making minimum wage would still earn below the poverty level for a family of four, but would earn an additional $3,640.

The table below displays the full-time income of a minimum wage worker in Illinois if the state enacted a $10.00 minimum wage in 2017 and indexed it to inflation. The stated goal of the Federal Reserve is to have annual inflation of 2 percent per year. Thus, the estimates assume an average minimum wage increase of 2 percent each year. By 2020, the estimated minimum wage would be $10.61 in Illinois and would ensure that full-time workers earn an annual income of at least $22,069. It is predicted that a minimum wage hike to $10.00 per hour in Illinois would have minimal employment impacts but would significantly raise total labor earnings. Incomes would continue to rise if the minimum wage was set at a base rate and continually indexed to inflation.

Screen Shot 2016-03-15 at 1.03.20 PMPoorer households spend a larger fraction of their income in the economy.

The Federal Reserve Bank of Chicago has found that “spending increases substantially after a minimum wage hike.” For every $1 increase in minimum wage, families with a minimum wage worker increase spending by $744 to $869 per year on average. Using these estimates, a family in 2017 with a minimum wage worker earning $10.00 an hour would increase spending by approximately $1,302 to $1,520, while a similar family in 2020 would spend between $1,756 and $2,051 more on average due to the inflationary increases. Overall, if the 733,000 Illinois residents who currently make below $10.00 earn at least that amount if 2017, household consumer demand could rise by over $1 billion in the Illinois’ economy.

Some groups and legislators have even proposed a $15 minimum wage. The merits of a $15.00 an hour minimum wage are playing out across the country. ILEPI has not evaluated the costs and benefits of a $15.00 an hour wage floor and can neither endorse nor oppose the proposal with confidence. However, it may be worth noting that 17% of Ph.D. economists and policy professors at accredited universities surveyed by ILEPI said they favored a minimum wage of $15.00 or more in Illinois.

There are many potential benefits of raising the minimum wage in Illinois. One possibility for Illinois is to raise the state minimum wage to $10.00 and then index it to inflation. Though Illinois and Chicago have minimum wages that are above the federal wage floor, more than 733,000 residents could see hourly wage raises with a $10.00 statewide minimum wage.

Increasing the minimum wage would reduce income inequality, increase consumer demand, and grow the economy in Illinois.


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