A Simple Explanation of Inflation, Minimum Wage, and Value Meals

Many people don’t really understand inflation, so I thought a simple explanation of inflation might help.  One of the more interesting ways is to look at the history of inflation as it relates to the minimum wage, because while only 2% of Americans make minimum wage, almost all of us have been minimum wage employees at some time.  Minimum wage is also perfectly representative of The American Bottom Line: the least money we think a person deserves to make for an hour of their labor.

What is inflation?

Simply put, inflation is the devaluation of currency.  Because the value of money doesn’t depend on any set standard, it is constantly changing based in the amount of money in circulation compared to the cost of goods/services.

That’s how you put it simply?

If I bought a can of Coke today, it will cost me a dollar.

That same can of Coke would have cost me a dime, fifty years ago.

As we increase how much money is out there in the world, the value of our money goes down; this makes prices of goods/services goes up.  Conversely, the price of goods/services can go up, which results in more money being put into circulation, as well.  But it’s all the same, for us consumers.

What does that have to do with minimum wage?

To start, let’s look at history and what money was actually worth, by a modern comparison.

Fifty years ago, minimum wage was set at a mere \$1.15 per hour which, from a modern perspective, sounds like a slave-wage.

But it only sounds awful until you realize that it was worth \$8.72, the way we think of money, today.

The way you think about money’s value, right now, minimum wage workers made \$1.50 more per-hour fifty years ago than they do today.

If you were working a 40-hour week in 1962, you pocketed a sad \$160 each month: it was actually like you made \$1,200, the way you think of money, now.

That’s hardly a bad minimum wage, for 1962.  What makes it upsetting is that current minimum wage employees only make \$1,100 a month, as a full-time worker.

Those people back in the 50s and 60s, thinking The Future would all be so awesome, like The Jetsons…it turns out, we began to pay our lowest-level labor at progressively lower rates, beginning in the 1980s and continuing to this day.

Here’s a boring-yet-informative timeline regarding minimum wage:

1955 – \$0.75 (\$6.41 in 2012 dollars)
1956 – \$1.00 (\$8.42 in 2012 dollars)
1957 – \$1.00 (\$8.15 in 2012 dollars)
1958 – \$1.00 (\$7.93 in 2012 dollars)
1959 – \$1.00 (\$7.87 in 2012 dollars)
1960 – \$1.00 (\$7.74 in 2012 dollars)
1961 – \$1.15 (\$8.81 in 2012 dollars)
1962 – \$1.15 (\$8.72 in 2012 dollars)
1963 – \$1.25 (\$9.36 in 2012 dollars)
1964 – \$1.25 (\$9.24 in 2012 dollars)
1965 – \$1.25 (\$9.09 in 2012 dollars)
1966 – \$1.25 (\$8.84 in 2012 dollars)
1967 – \$1.40 (\$9.60 in 2012 dollars)
1968 – \$1.60 (\$10.98 in 2012 dollars)
1969 – \$1.60 (\$9.99 in 2012 dollars)
1970 – \$1.60 (\$9.45 in 2012 dollars)
1971 – \$1.60 (\$9.05 in 2012 dollars)
1972 – \$1.60 (\$8.77 in 2012 dollars)
1973 – \$1.60 (\$8.26 in 2012 dollars)
1974 – \$2.00 (\$9.29 in 2012 dollars)
1975 – \$2.10 (\$8.94 in 2012 dollars)
1976 – \$2.30 (\$9.26 in 2012 dollars)
1977 – \$2.30 (\$8.70 in 2012 dollars)
1978 – \$2.65 (\$9.31 in 2012 dollars)
1979 – \$2.90 (\$9.15 in 2012 dollars)
1980 – \$3.10 (\$8.62 in 2012 dollars)
1981 – \$3.35 (\$8.44 in 2012 dollars)
1982 – \$3.35 (\$7.95 in 2012 dollars)
1983 – \$3.35 (\$7.71 in 2012 dollars)
1984 – \$3.35 (\$7.39 in 2012 dollars)
1985 – \$3.35 (\$7.13 in 2012 dollars)
1986 – \$3.35 (\$7.00 in 2012 dollars)
1987 – \$3.35 (\$6.76 in 2012 dollars)
1988 – \$3.35 (\$6.49 in 2012 dollars)
1989 – \$3.35 (\$6.19 in 2012 dollars)
1990 – \$3.80 (\$6.66 in 2012 dollars)
1991 – \$4.25 (\$7.15 in 2012 dollars)
1992 – \$4.25 (\$6.94 in 2012 dollars)
1993 – \$4.25 (\$6.74 in 2012 dollars)
1994 – \$4.25 (\$6.57 in 2012 dollars)
1995 – \$4.25 (\$6.39 in 2012 dollars)
1996 – \$4.75 (\$6.94 in 2012 dollars)
1997 – \$5.15 (\$7.35 in 2012 dollars)
1998 – \$5.15 (\$7.24 in 2012 dollars)
1999 – \$5.15 (\$7.08 in 2012 dollars)
2000 – \$5.15 (\$6.85 in 2012 dollars)
2001 – \$5.15 (\$6.67 in 2012 dollars)
2002 – \$5.15 (\$6.56 in 2012 dollars)
2003 – \$5.15 (\$6.41 in 2012 dollars)
2004 – \$5.15 (\$6.25 in 2012 dollars)
2005 – \$5.15 (\$6.04 in 2012 dollars)
2006 – \$5.15 (\$5.85 in 2012 dollars)
2007 – \$5.85 (\$6.46 in 2012 dollars)
2008 – \$6.55 (\$6.97 in 2012 dollars)
2009 – \$7.25 (\$7.74 in 2012 dollars)
2010 – \$7.25 (\$7.62 in 2012 dollars)
2011 – \$7.25 (\$7.38 in 2012 dollars)
2012 – \$7.25 (\$7.25 in 2012 dollars)

Did you get all that?

Simply put: the way we think about money is wrong.  We think of a dollar as a dollar, but it hasn’t always been a dollar.  It used to be much more than a dollar.  The change was just so gradual, we didn’t notice it.  But, it’s cool.  Keep thinking that a dollar is a dollar, and I’ll do the work for you.

But you still need to think.

Tighten the straps on those Thinking Caps: here we go!

Between 1956 and 1986, no one made less than \$7 per hour.  In 1968, minimum wage was up to \$11 per hour!  For thirty years, the minimum wage was as high or higher than it is today.  If you were flipping burgers for minimum wage between ’56-’86, you were paid more money than if you were flipping burgers after ’86.

The low point really came in the early 2000s, where we find the record for longest-standing minimum wage (ten years) as well as the lowest value of minimum wage (\$5.85), in 2006.  The way we think of money, as it is worth to us at this moment in time, you were only getting paid \$5.85 an hour, six years ago, compared to the \$7.25 you get today.  If \$5.85 sounds like that’s better than getting paid \$5.15 per hour, “You’re just not thinking fourth-dimensionally!”

Remember how, in 2006, a can of Coke might still only cost you seventy-five cents out of the machine, but today, it easily costs a dollar?  There’s a reason for that!  This is how it all works.

Basically, we’re all getting screwed.

Value Meals and Minimum Wage: the great consumer equalizer.  Outside of the Glory Days when minimum wage workers made  35% more than they do today (i.e. 1968), a burger-and-fries generally costs the same as an hour of minimum wage labor.  Interesting coincidence, right?  When your grandpa talked about how a burger and fries only cost a dollar in 1960, it’s good to remember that minimum wage was also a dollar in 1960.

In 2006, \$5.15 bought you a value meal.  But you certainly can’t find a value meal for \$5.85 today!  You can find one for \$7.25, though.  Same goes for 1960 – while a burger-and-fries cost you a dollar, minimum wage was also a dollar – adjusted for inflation to modern dollars, that dollar is really \$7.75: pretty close to the cost of a burger-and-fries today.

Inflation is great for governments and banks, because most consumers don’t notice it, so governments/banks still get to keep the profits flowing.  In your day-to-day life – your year-to-year life, even – most consumers just don’t notice that money is worth progressively less, because most consumers don’t understand the concept of money’s value.

At any moment in life, we simply think “money is worth what it’s worth – the dollar in my pocket doesn’t change.”

But, it does.  It changes a lot.

The thing is, you only really notice the change of value of your money when you go to the store and notice a product suddenly costs much more than it did before.

The reason for this is simple: money is worth less than it was before, but companies want to make the same profit.  Of course, there are other ways to make that happen.  Ice cream is my father’s favorite example.

There’s always another example.

Ice cream manufacturers, faced with the problem of inflation, chose to decrease the amount of ice cream instead of increase the price; that’s why, today, you pay the same numerical price (e.g. “\$5.00”) for a carton of ice cream the same as you did in 2001, except today it has 75% of the volume it had in 2001.  Ice cream companies didn’t like the idea of jacking the price up by 25% because they feared no one would be willing to pay an extra dollar (or more) for the same ice cream. So they decreased the amount they gave but charged the same price to you.  Almost no one even noticed, which is precisely what they were banking on.

The fact is simple – every moment you exist, money loses value.  It’s a slow process, but it screws you in crazy ways.

Let’s get back to the cash!

Let’s say you had \$200 hidden in your jacket pocket in 1992: it was worth \$200 to you.  And, today, twenty years later, you put on the jacket and find that \$200.  The money hasn’t changed – it’s still \$200.  But the value of the money has changed a great deal!

In 1992, you could have taken that money to a store and bought 400 cans of Coke at fifty-cents a pop; today, you can only get 200 cans of Coke, because they now cost a dollar each.

You could have bought 40 value meals in 1992; now, you can only buy 30 of them.

You could have bought 50 cartons of ice cream in 1992 or 50 cartons of ice cream today; the difference is that, in 1992, it would have been 25 gallons of ice cream – today, it’s only 19 gallons of ice cream.

Your savings account gaining you 2% interest a year is actually not gaining you any money, because inflation rises around 2% each year!

The \$100 you had in your account last year might have grown to \$102 this year, but it doesn’t matter, because \$100 in 2012 was worth \$102 in 2011!  You gained nothing!

That’s it.  That’s how inflation works.  Every year, your money is worth around 2% less than it was the year before.  And it matters, most importantly, in terms of minimum wage, because we don’t adjust our minimum wage to reflect the value of the currency, every year.

It’s a pretty sneaky was to continue to screw over the lower class of the USA.  The Man continues to pay workers less and less money, simply by strategically spacing out raises in the minimum wage; workers rejoice at wage increases, not realizing that it was actually an overdue way of keeping them exactly where they are.

Don’t forget to tip your waitresses.

5 thoughts on “A Simple Explanation of Inflation, Minimum Wage, and Value Meals”

1. u make it seam like the world is going down to shit, i mean look at life now man, like u said if u had 200usd in 1980 u could not even buy a computer or a tv, but now, omg we got these things called cell phones that are faster the anything in 1980 🙂

also inflation can be beat, many ways, cars, bikes, rear things, i mean a car that sold in 1980 for maybe 5k today is worth 20k because its a rear item.

prices r funny, as long as someone is willing to pay for it it gets sold.

minimum wage is a funny thing, i remember when i was 16 and started my first job, i was makes 4 times more then the minimum wage 🙂 then at 17 it ketches up to me, so i was getting like 6.50usd per hour, i was working for a big american company, in total i made about 3000usd that time period, if i just told them not to pay me and just give me some stocks in that company at about 3 usd per shear at that time, in 2010 being sold for 35usd per shear i would be a maid man,

its not that the rich get richer and poor stays poorer, i think it has more do to with the education and determination of an individual

like u said in the business card last post, most foreigner that come here are just lazy slabs right, so same thing about people that dont strive to make more money then just minimum wage.

dont get me wrong buddy, i dont know much, i am learning from you, so please let me know what u think about what i just wrote.

homer

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4. a says:

Inflation is also caused by excess demand for something scarce and monopolisation of something essential. eg. land, property, energy etc. Think Hong Kong with its exorbitant property prices, enormous rents, its property tycoons who own most of HK property and the rising population there. Inflation isn’t all to do with “money (ie. debt) printing”