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Global Macro: Federal Minimum Wage Fails to Keep Pace

NEW YORK (TheStreet) -- In recent weeks, some U.S. employees earning minimum wage have protested what they deem as unfair pay.

The workers claim that the hourly minimum-wage scale hasn't been adequately adjusted for inflation, thus diminishing the actual value of their wages over time. A look at historical trends of minimum wage and wealth in the U.S. shows what would be a fair value today.

In my charts, minimum wage is represented by the legal federal wage floor that companies must pay employees. The measure of wealth is represented by the Dow Jones Industrial Average. Data from both graphs start in 1955 and are adjusted for yearly inflation.

The first chart below is of hourly minimum wage. The data show that from the 1950s to 1970s hourly wages rose relative to inflation. A sudden drop occurred in the 1970s, however, and the minimum wage has been stagnant for the past 20 years.

The abandonment of currencies pegged to gold in the 1970s caused a quick and drastic rise in inflation, which affected all facets of the economy from financial markets to disposable income. Minimum wage did improve in nominal terms during the 1970s, but not enough to offset what had been diminished by inflation.

Similarly, fiscal policy wasn't accommodative to minimum wage in the 1980s. The rate stayed flat at $3.35 an hour and diminished in value against inflation. Inflation in the 1970s and 1980s damaged the real value of the wage floor, which hasn't been corrected by policy makers.

The fast-food workers who have gone on strike are demanding that the current federal minimum wage be doubled to $15. In real terms, that represents a 133% growth from the 1955 level. That kind of extreme rise over a short period of time looks too steep for companies to accommodate while they try to manage their profit margins.

A more reasonable number would be around $10.60 an hour. That figure factors in inflation over the past few decades and would put the relative value of minimum wage at its highest level since the 1960s.

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