Could a Raise in Minimum Wage Trigger Inflation?

Here at Inflation Data we believe that all other things being equal the primary cause of inflation is an increase in the money supply, i.e. “too much money chasing too few goods.” But raising the minimum wage may cause other distortions that will have an effect on the economy so that one simple stroke of a pen can still have a major impact. ~Tim McMahon, editor

The Law of Unintended Consequences 

raise Minimum wageWhen the Government increases the minimum wage that employers need to pay to their employees, does it cause more problems later? The Government speaks of a raise as a good thing for the economy in order to boost sales (through more disposable income for the poor) and help low-income families pay bills. However, there are many aspects that are rolled into the raise in minimum wage that most people don’t consider.

Legislating Wealth- The President seems to think that the government can legislate wealth. He believes that the Government is all powerful and with the stoke of a pen, he can make everyone rich. Why stop at $9/hour why not raise the minimum wage to $20/hour or even $100/hour? Hey why not instantly make everyone millionaires and say the minimum wage is $1 Million / hour? You might be saying that’s crazy, that would never work, but the same economics apply, all that is different is the severity.

But recently the President Obama said, “Let’s declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families.”

Business Implications -Although some companies may have large enough profit margins to not raise prices, most businesses will not be able to afford increasing the minimum wage without raising the prices of products or services. Costs of goods will most surely have to rise in order to pay employees or alternatively companies who can not raise their prices will have to resort to layoffs or go out of business altogether.  If prices rise in order to help pay for increased wages, we will see inflation.

According to Minimum Wages vs Unemployment:

Much of the current problem with youth unemployment is due to the high minimum wage increases we’ve seen over the last five years. When the crisis hit in 2008, the minimum wage was $5.85. Lots of jobs got shaken up. Low-wage workers hit the road. When things settled down again, they went knocking on doors. The next year, they found that it was illegal to accept a wage less than $7.25. And we wonder why so many people are unemployed? It’s not a mystery. The huge increase in the wage floor is not the whole reason, but it is a contributing factor.

So anyone who understands basic economics knows that the result of raising the minimum wage can only be:

  1. Higher unemployment as companies scale back to reduce expenses.
  2. Higher costs to consumers as companies raise prices to cover the higher wages they have to pay
  3. Companies closing their doors because they can’t scale back or raise prices.

So the result of an increased minimum wage is either higher inflation or higher unemployment both of which are components of the Misery Index thus increasing the minimum wage will most likely increase the overall misery of the country.

In their book Minimum Wages economists David Neumark and William Wascher offer a comprehensive overview of the evidence on the economic effects of minimum wages.  Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce
their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital. The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

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Jason Miner an expert freelance writer loves writing articles on different categories. He is approaching different bloggers to recognize each other’s efforts through www.blogcarnival.com. He can be contacted through e-mail at jasonminer8[at]gmail[dot]com.

Image courtesy of sdmania / FreeDigitalPhotos.net

 

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Comments

  1. Andrew says

    “So anyone who understands basic economics knows that the result of raising the minimum wage can only be:
    Higher unemployment as companies scale back to reduce expenses.”

    And everybody who understands economics beyond 1.01 knows that there exist market frictions like market power and information asymmetry that enable firms to push wages below the marginal product.

    • says

      Wow big words… Sounds like you’re blowing smoke or what they call in Texas “All hat no cattle”. Market friction is almost always temporary it takes time for things to level out but it does even out. “Information asymmetry” is simply one side having more info than the other. So what? That is why companies have policies against telling other employees how much you make. Companies love it (because sometimes they have to pay more to get good employees and they don’t want the marginal ones to know how much the good ones make). But we’re talking minimum wage here. Sounds like a bad joke. How much does a minimum wage earner make?… Minimum wage Duh.

      Market power means a company can raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. That’s the point of competition. So market power only works when you have some sort of monopoly. How many monopolies exist? And of those that do, how many pay minimum wage? Not many, otherwise their trade secret would leak out. Or because they need highly skilled people to implement it. And last I checked highly skilled people don’t make minimum wage. The only other way to ensure a monopoly is through government interference. Once again back to the Government screwing up the economy. But in exchange for granting a monopoly modern governments exact control so for example utilities can’t set their own prices (or wages). There are very few minimum wage people working with high voltage last time I checked. Jobs with Utilities pay very well because they can afford it because they have a monopoly and everyone knows it.
      Applying market power to workers would mean that you had a captive supply of labor say in the old mill towns but today the workers just pack up and move to some place where there are more jobs (around the country or around the world). No more market power.

      You are forgetting competition, if one company tried to pay less than the going rate they rapidly lose employees. Just had a perfect example near me. A new Wendy’s opened and paid minimum wage and was having trouble hiring workers. A few weeks later a Bojangles opened around the corner and offered a few cents more an hour and promptly half the workers at Wendy’s left and went to Bojangles. It’s called competition it works for both prices and wages and should be allowed to work to the downside (when market conditions call for it) as well as the up side. If all the workers were willing to work for half as much why should the company have to pay twice what the people are willing to accept? If the company could get cheaper labor you would get better service because the company would hire twice as many workers so there wouldn’t be dirty bathrooms and trash all around and long lines at the cash register. All those things discourage customers and if a company could afford to they would eliminate them. Minimum wage workers are basically a commodity… not much distinction between them so they flow where ever is in their own best interest so it is impossible to pay them less than fair market wages for their skills. Unless you have some sort of hold over them (illegal aliens, slaves, lack of transportation, etc.) Also once there is a distinction that makes one worker stand out from the competition companies will pay more to keep them and they are no longer minimum wage.

  2. says

    Ahh… that is the purported goal of raising the minimum wage… to help the masses of poor get a “living wage” and it is a worthy goal. But it assumes that the “greedy capitalists” are somehow paying them less than they are worth and taking advantage of them. It ignores the fact of competition in the marketplace. If the poor minimum wage worker were truly worth more someone would be willing to pay him that without the coersion of the government. Also although raising the minimum wage helps the highly visible minimum wage workers it hurts those who lose their jobs and enter the masses of the unemployed. One reason our unemployment rate is crrently so high is because in 2008 the minimum wage was raised thus forcing marginal businesses to cut back on expenses i.e. labor. Since they have to pay each laborer more they can only afford fewer of them. (or more of them with fewer hours each).

    • says

      I just came across a perfect real life example that illustrates what happens when the government tries to legislate wealth. My friend Jeff just posted this on Facebook. “My job was cut from 40 to 25 hours a week so that my employer will not have to pay health insurance due to the (UN) Affordable Health Care act. My insurance went up $100 so that the IRS can enforce the (UN) Affordable Health Care Act. Thank you Mr. President.”

      So this is how the government “helps” the poor through legislation cut their hours and raise their taxes.

    • EvilVegan says

      So… wage disparity between bottom earners and top earners is a non-issue in your little bubble of self-delusion?

      Minimum Wage went up by 75%, top earner salary went up by 500%. (hyperbolic rhetoric, I don’t feel like looking up the actual disparity for this point, but you have to know that bottom earners are earning less proportionately relative to historical levels.)

      I don’t think the problem is the minimum wage, I think the problem is that capitalists don’t adjust for it properly, they gradually pass the cost back to the consumer, lay off some workers, pocket the profit, and the inflation cycle continues.

      Minimum wage prevents deflation, maximum wage (through progressive taxation or actual maximum wages) would prevent inflation. You are just being greedy. Or are the puppet for the greedy.

  3. John Dee says

    There is a flaw in this analysis. It is true that raising the minimum wage is a very blunt instrument, which for some can cause more trouble than good, but the overall effect will be positive. The reason for this is that the wages of the minimum wage workers are but a tiny fraction of the consumer price. Raising the minimum wage only means redistribution from the haves to the have-nots, which in turn channels more resources from luxury into commodity, which would be healthy for this economy.

    • Brad C says

      There is absolutely no reason for the haves to do without when they could (and would) increase the cost of their goods and services to match. Historically, this is a proven fact: when wages and regulation rise, the cost rises while the profits also rise, as they would either way.

      No business in their right mind would say “sure, I’ll lose out since other people want more of my money”.

      • Joe Jarvis says

        And your solution for this would be…? To continue to hurt the minimum wage class so as not anger the rich into making more even more disgusting profit levels? Keynsian bottom up economics works, that is why no Democratic president (with the exception of Carter) over the last 60 years has ever left office with unemployment above 6% and no Republic president over the last 60 years has ever left office with unemployment under 8.6%. When the worker is sheltered from the effects of greed (progressive economic policies), the entire country benefits, and when greed is allowed to run rampant and unchecked (conservative economic principles), only the top 1% benefit and the rest of the country is taken advantage of.

        • Abe says

          Really?
          Nixon left office in Aug 1974: Unemployment was at 5.5%
          Ford left office in Jan 1977: Unemployment was at 7.6%
          Regan left office Jan 1989: Unemployment rate was 5.3%
          Papa Bush left office in Jan 1993: Unemployment was 7.3% (and falling)
          Bush Jr left office in Jan 2008: Unemployment was at 7.9% (rising)

          Every Republican left office with unemployment under 8.6% in the past 60 years.

          Nobody takes advantage of the poor in a capitalistic society. The only way the 1% gets money from the poor is to convince them to buy their goods or services. A voluntary transaction. When government gets involved, it becomes crony capitalism and that is always bad. That is the only way the corporation can take advantage of the poor… say if the government forces you to buy a good or service or face a fine. Now this is good for the corporation, and good for the government (fines and kickbacks)… but bad for the people.

          As for minimum wage… That actually HURTS the poorest and least skilled people.

          Lets go through a simple example. Lets say I own a burger joint. I have 3 employees. Al, Bob, and Carl. I pay them each 7.25/hr. Now after all bills (except for labor) I make 10 cents per burger sold.

          Al can flip 100 burgers in an hour. 100 * 0.10 = $10
          Bob can flip 120 burgers in an hour. 120 * 0.10 = $12
          Carl can flip 80 burgers in an hour. 80 * 0.10 = $8

          I pay them the 7.25 for that hour and my net profit from each is:
          Al: $10 – 7.25 = 2.75
          Bob: $12 – 7.25 = 4.75
          Carl: $8 – 7.25 = 0.75

          Each is earning me a profit. Now lets say we raise minimum wage to 8.50. Now lets look at what each earns.
          Al: $10 – 8.50 = 1.50
          Bob: $12 – 8.50 = 3.50
          Carl: $8 – 8.50 = -0.50

          Carl, the least skilled and in the most need of help, is now losing me money. I would be 50 cents an hour richer if I let him go. Raising the minimum wage was good for Al and Bob. They got more money, but it was very bad for Carl. And Al and Bob would be the most likely to earn raises. They are very profitable for me, so it would be in my best interest to ensure they are happy and aren’t looking to get a better paying job at the burger place across the street.

          The only way for me to keep Carl, would be to raise prices and if everybody does this, cost of living goes up. The “Living wage” is a carrot on a stick. No matter how much you raise minim wage, it affects the cost of living, and that living wage pushes out a head more.

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