Wage-ing The Battle

USA Today reports wages are falling to their worst yearly drop since 1991, but driving it is deflation.

Colorado announced this week it will become the first state to lower its minimum wage since the federal minimum wage law was passed in 1938. The state will cut its rate by 4 cents to $7.24 an hour Jan. 1, to reflect a drop in the consumer price index.

Retirees are also feeling some pain. Social Security announced Thursday that it will not give cost-of-living increases to beneficiaries next year because prices have fallen in the past year.

Weekly wages have tumbled largely because employees are working fewer hours — an average of 30 per week — than at anytime since the government began tracking the data in 1964.

Hourly wages are stagnant or declining, too. After adjusting for inflation, average hourly wages have dipped a half-percent this year to $18.67 an hour in September.

Prices measured by the CPI are down 1.8% from their peak in July 2008. For seven months, the CPI has declined from the same month a year earlier — the longest stretch since 1955.

That trend is upsetting a wide range of wage-and-benefit packages in this recession.

Nearly 80 million people have wages or benefits tied to changes in the consumer price index. Those include contracts for 2 million unionized workers, food stamp payments and some child support checks. The Labor Department announced Thursday that federal pensions won't increase next year.

The consumer price index fell 3.3% in the last quarter of 2008. Most cost-of-living adjustments include the end of last year in changes that take effect Jan. 1.

Ten states link minimum wages to inflation. But, unlike Colorado, most states do not cut minimum wages when prices fall.

Ohio recorded a 0.2% drop in prices in the past year, says Dennis Ginty of the Ohio Department of Commerce. Like Social Security rules, Ohio's law permits only cost-of-living increases, never decreases, Ginty says.

Business groups say this one-sided inflation adjustment is unfair. "The bar should move both ways, up and down, if you're going to have a cost-of-living adjustment," says Shawn Cleave, a lobbyist for the Oregon Farm Bureau.

The problem is with the dollar's collapse, we're now seeing a lurch in the other direction, only without the wage increases to go with it. the result will be our consumer driven economy will be flat broke soon, and without anyone to do the consuming.

What recovery? What middle class?