Does raising the minimum wage increase inflation?


In the 2010s, fast food workers in the United States began demanding a minimum wage of $ 15 per hour. If your claim is granted and the federal minimum wage increases to $ 15 per hour, a typical minimum wage worker could earn about $ 30,000 per year.

Opinions are mixed on whether raising the minimum wage increases inflation. A related question is: How would an increase in the minimum wage affect employment levels?

Historically, high unemployment has typically coincided with high inflation. It is possible that raising the minimum wage could help stimulate the economy due to the greater purchasing power of workers who receive higher wages. It is also possible that a government-mandated minimum wage that is too high could have a negative impact on employment levels.

Key takeaways

  • Raising the minimum wage has been a problem for decades, with recent pressure to raise the federal minimum wage to $ 15 an hour.
  • Opinions are mixed on whether raising the minimum wage increases inflation.
  • Some economists argue that raising the minimum wage artificially creates labor market imbalances and leads to inflation.
  • Other economists point out that when minimum wages have historically risen, inflation did not follow.

Does raising the minimum wage increase inflation?

The argument that minimum wages increase inflation

The increase in the minimum wage has many critics. First, economists argue that a government-mandated minimum wage that is too high creates an artificial floor in the labor market, which can cause distortions and inefficiencies.

Their rationale is that, in a free labor market, someone may be willing to work for $ 10 an hour. However, since the government requires an hourly pay of at least $ 15, that worker cannot bid competitively lower for the job.

A second argument is that employers, forced to pay more wages, will end up hiring fewer workers, which can actually lead to higher unemployment because those workers who were perhaps willing to work for lower wages are not hired.

With respect to inflation, the so-called wage push inflation is the result of a general increase in wages. Under this hypothesis, to maintain corporate profits after a rise in wages, employers must increase the prices they charge for the goods and services they provide.

The general increase in the cost of goods and services has a circular effect on the wage increase; Eventually, as goods and services on the market increase overall, higher wages will be needed to offset the rise in prices of consumer goods.

According to economic analyst Ed Rensi, a former McDonald’s executive, a higher minimum wage could eliminate some existing jobs and could also result in the closure of a substantial number of small businesses.

In theory, the increase in the minimum wage forces entrepreneurs to raise the prices of their goods or services, which stimulates inflation.

In reality, the relationship between rising wages and inflation is more complex: wages are only part of the cost of a product or service paid by consumers. A higher minimum wage can be offset by higher worker productivity or by cutting a company’s workforce.

However, while this may be true in certain service sectors, it is not clear that the effect on wages will spread to other sectors, especially when faced with competition from foreign exports using cheaper labor.

The argument that a higher minimum wage does not increase inflation

While there are arguments in favor of wage-led inflation, the empirical evidence supporting these arguments is not always robust. Historically, increases in the minimum wage have had a very weak association with inflationary pressures on prices in an economy.

For example, in 2016, researchers from the WE Upjohn Institute for Employment Research found that “[Using monthly price series] … the carry-over effect is entirely concentrated in the month in which the minimum wage change takes effect, and is much less than what canonical literature has found. ”

His research examined the effect of prices on minimum wage increases in various US states from 1978 to 2015. He intended to explore the magnitude of the pass-through effect and add to the discussion of how different policies can shape the effect of that minimum. salary increases have on prices.

His first main finding was that “wage-price elasticities are notably lower than those reported in previous work: we found that prices grow 0.36 percent for every 10 percent increase in the minimum wage.” Additionally, price increases that follow minimum wage increases have generally occurred in the month that the minimum wage increase is implemented, and not in previous or subsequent months.

Based on their research, they also claim that a “small” increase in the minimum wage (between five and 15%) does not lead to higher prices. On the other hand, large increases in the minimum wage have clear positive effects on producer prices (which can lead to higher consumer prices).

The bottom line

Is raising the minimum wage a good idea for the economy? It depends on the sources you consult. While some claim that raising the minimum wage to an excessively high rate would put inflationary pressure on the economy, research shows that raising it to keep pace with inflation would only have a minimal effect.

www.investopedia.com

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Mark Holland

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