To compensate for inflation, economists like to use real or constant dollars—dollars that are adjusted in a way that removes the distortion of inflation. This involves the use of a base year—a year that serves as a comparison for all other years.
Although the computations are complex, the results are not. Panel B, using constant base-year prices, shows that the minimum wage had relatively more purchasing power in 1968 than in any other year. As long as the base year serves as a common denominator for comparison purposes, the results would be the same regardless of the base year used.
Panel B also shows that the purchasing power of the minimum wage goes up whenever the wage increases faster than inflation. This was the case in 1997, when the wage was increased to $5.15. However, the minimum wage remained the same through 2006 while prices went up during the same time period. This means that the wage actually purchased a little less each year. As long as the minimum wage remains unchanged and inflation continues, the purchasing power of the wage will continue to decline.
Panel C shows the minimum wage as a percentage of the average manufacturing wage. In 1968, for example, the minimum wage was $1.60 and the average manufacturing wage $3.01, or 53.2 percent of the manufacturing wage for that year. The ratio peaked in 1968 and then slowly declined. As long as the minimum wage stays fixed and manufacturing wages go up, this ratio will continue to decline.
The minimum wage will certainly be raised again. What is not certain is when this will happen. When the minimum wage becomes unacceptably low to voters and their elected officials, Congress will increase it. Some people even want to link the minimum wage to inflation, so that the wage will automatically rise when prices rise.
^^HDSEDES® Summarizing What is the difference between current dollars and real dollars?
real dollars or constant dollars dollar amounts or prices that have been adjusted for inflation base year year serving as point of comparison for other years in a price index or other statistical measure
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