Math Practice
Activity 6: Real Dollar Value of Minimum Wage
Work through the following activity, considering concepts from the text.
Periodically, the U. S. Congress votes to raise the minimum wage. Although one might assume
that increases over time improve the economic status of workers, one must consider the chang-
ing value of the dollar. In the same way that the minimum wage fluctuates, the value of the dol-
lar may change radically from one year to the next due to various factors, one of which is
inflation. As a result, a significant increase in the minimum wage may not necessarily represent a
significant increase in real, or inflation-adjusted, dollars.
The Consumer Price Index (CPI) measures the rate of inflation as it relates to day-to-day living
expenses; it is measured against the dollar value in 1982-1984 (the "chained" base year). If the
CPI in a given year is 200, a minimum-wage worker will need $200 to purchase the equivalent
of what she or he could have bought for $100 between 1982 and 1984. In real dollars, 5100 in
a year with a CPI of 200 would have been worth $50 in 1982-1984.
You can easily convert the minimum wage for a given year to a base year's dollars. Divide the
base year's CPI by the given year's CPI, then multiply the result by the minimum wage figure for
the given year:
base year's CPI
base year's dollars - Da
given year's CPI
X given year's minimum wage
The tables below provide the CPI and the minimum wage for several years.
Consumer Price Index (CPI):
Year 1982-1984 1991 1996 2001
CPI 100 136.
2 156.9 177.
1
Source: Federal Reserve Bank of Minneapolis (on-line)
2002
179.
9
2003
184.0
Pearson Education, Inc. publishing as Pearson Prentice Hall. All rights reserve
2002
2003
Minimum Wage:
Year
1984 1991 1996
Minimum Wage 83.35 $4.25 $4.75
Real Dollars
*Source: U. S. Department of Labor (on-line)
2001
$5.15
2002
$5.15
$5.15
1. Calculate the minimum wage for each year in real (1982-1984) dollars, filling in the
"real dollars" row in the table. In what year would a minimum-wage worker have had the
greatest amount of purchasing power?
2. In 2003 the U. S. Congress was considering a minimum wage increase to $6.65, to be
phased in over two years. Calculate the equivalent of such an increase in real (1982-1984)
dollars. (Hint: Estimate the future CPI using the data from the early 2000s.)