States That Raise Minimum Wage May Counterbalance Inflation

​With inflation near its highest rate, many states' attempts to modify their minimum wage standards could lessen the sting of gas and food prices.  

The Consumer Price Index for all urban consumers increased by 9.1 percent over the last 12 months ending in June, which marked the largest 12-month increase since the period ending in December 1981, according to the U.S. Bureau of Labor Statistics.

"Inflation is clearly on the minds of lawmakers in various states," said Paul Piccigallo, an attorney with Littler in New York City. "Soaring inflation has caused lawmakers to reassess the minimum wage in their states and localities, with some calling to increase minimum wage to address rising inflation."

"It has taken a while to gain traction, and inflation tends to be a delayed response to excessive government spending, but finally the trend toward increases in the minimum wage in some states is evident," said John K. Skousen, an attorney with Fisher Phillips in Irvine, Calif. "Nearly two-dozen states, counties and local jurisdictions increased minimum wage for workers in 2022."

Those increases may have been years in the making, with voters passing referenda to enact the changes years earlier when inflation wasn't such a pressing issue. But today, the wage increases could counteract some of inflation's effects.

"With the lack of traction in Washington to increase the federal minimum wage, we anticipate that more states and jurisdictions will pass measures to increase minimum wage at the local level. Hawaii was the most recent state to do this on June 23, increasing the state minimum wage to $18 by 2028," Skousen added. "We are also seeing private companies pledge higher minimum wages for entry-level workers at an organizationwide level in response to some of these pressures."

A higher minimum wage means higher payroll taxes for employers, as well. "The increase of the minimum wage has many effects that may be overlooked, including where the minimum wage is an element in the calculation of other wages or benefits, such as sick pay, overtime exemption thresholds or other statutory entitlements," Skousen explained.

"Sometimes, employers fail to take sufficient action to increase the minimum wage on all personal documents or compensation plans where minimum wage is an element of compensation. Even when such documents have been updated, payroll employees may overlook them or fail to consider the increased minimum wage as a factor in calculating other wages due," he added.

The consequences for noncompliance are high, including civil lawsuits, administrative claims filed in state and federal agencies, audits conducted by state and federal agencies, back-pay orders, interest, penalties, attorneys' fees, class-action lawsuits, and adverse publicity, Skousen noted.

HR professionals need to stay attuned to any changes in their state and the complexities of the law.

"Increasing minimum wage across the board for a potentially large set of employees, in multiple states, is not a simple process," Piccigallo said. "For states and localities where the minimum wage is indexed to the Consumer Price Index, HR professionals must be especially careful because there is no uniformity across jurisdictions regarding how Consumer Price Index adjustments are calculated."

Some employers generally aim to keep pay increases somewhat equal across different levels of the company. "There may be a ripple effect on midlevel employees who will expect to be paid higher rates as minimum wages continue to increase," Skousen said.

Differences by State

Under an executive order from President Joe Biden, the minimum wage for federal civilian workers and federal contractors increased to $15 per hour starting in late January. State and local minimum wage standards vary widely.

Thirty states and Washington, D.C., have minimum wages above the federal minimum wage of $7.25 per hour, according to the National Council of State Legislatures, a Denver-based organization that represents state legislatures. Five states (Alabama, Louisiana, Mississippi, South Carolina and Tennessee) don't have a state minimum wage. Georgia and Wyoming have a minimum wage below $7.25 per hour.

"There are currently 20 states that follow the federal minimum wage of $7.25 per hour, nearly all of which have a lower cost of living than the national average," Skousen said. "Other states, or localities within states, with a progressive orientation push for higher benefits and wages often tied to political lines, for which demands come naturally by virtue of a higher cost of living in such areas." 

"The trend is increasing for isolated urban areas having much higher local minimum wages than the state or federal minimum wage," he added.

But the trend doesn't always follow the expected partisan divide. "More traditionally moderate or conservative states like Montana and Ohio, both of which have laws that index minimum wage to inflation, recently increased their minimum wages as a result of rising inflation," Piccigallo pointed out.   

Some business groups argue that raising the minimum wage means consumers will be forced to pay even higher prices for goods and services. Many small businesses are just getting back on their feet after pandemic-related shutdowns.

"Opponents of raising the minimum wage, often from the business community, have cited business struggles in the wake of the COVID-19 [pandemic], and have argued that businesses cannot afford the increased labor costs that a higher minimum wage would require," Piccigallo said.

"Interestingly, lawmakers in some localities have sought to rein back inflation-tied minimum wage increases," he added. "Lawmakers cited the need to help struggling businesses stay afloat, guard against inflation and provide long-term budget stability."