Lately there has been discussion about raising the national minumum wage in the US. One of the more common arguments against it is that this will cause inflation and leave us back at square one. That is, everyone will get more money and prices will go up. On the surface this makes a little bit of sense. Maybe. However, logic doesn't really favor this conclusion.
Inflation is a complex phenomenon affected by many factors, including wage increases. Say everyone got a 10% raise, whether by government mandate or printing money or some other cause. In this case, it is reasonable to assume that currency value when measured as purchasing power would re-normalize to neutralize the wage increase. That is, everything now costs 10% more so no one wins. However, we're not talking about giving everyone a raise, we're talking about giving the segment of the population at the lowest income bracket a raise. This accounts for less than 5% of the US population.
While it is true that the raise would have cascading effects beyond the lowest earners, those effects would be muted. What I mean is that if an employer raises the wages of its lowest earning employees, it would probably also raise the wages of those in brackets just above those employees. However, the impact of this effect would dissipate as you get further up the income chain and probably wouldn't be a linear curve (if for example you were to plot percent wage increase against original wage. Maybe it would be logarithmic? I don't know, I'm just guessing). My point is that a 10% wage increase to the shelf stocker earning $7.25 / hr wouldn't cause a 10% wage increase to the accountant earning $30 / hr or the CEO earning a billion dollars an hour or whatever.
I think this at least partially addresses the other end of the argument, which is that in addition to increasing wages, we'd be increasing costs. That is, wouldn't the cost of a hamburger go up 10% if everyone at the McDonald's now earns 10% more? Wouldn't the company pass along the increased labor costs to its employees? Maybe, but maybe not and even if they did it wouldn't be anywhere near 10%. There are a couple of reasons why. The first is that, as mentioned before, the increase in minimum wage to the lowest earning 5% of the population would not boost the wages of the remaining 95%, meaning that it is not as though everyone else has more money with which to purchase these more expensive products.
Producers would be warry of passing along all of their increased labor costs to consumers. Another, perhaps more important, fact is that labor is only one part of a company's costs. There is not a direct, 1-1 relationship between the labor cost of people earning minimum wage and the cost of the products they produce. Various material and overhead costs (not to mention the wages of people earning above the minimum wage) tend to dwarf the costs of these workers. The statistics bear this out. Historically, increases in minimum wage have been linked to far smaller increases in the costs of goods. Some increase does inevitably happen, but the ratio when compared to the percentage increase in minimum wage is more like 10-1 or higher. (Or 1-10; I forget which thing I'm putting in the denominator here).
I think the final, and perhaps most damning issue with the linkage between minimum wage and inflation is that the minimum wage actually lags inflation. Because federal and state minimum wages can only be increased by legislative action, such increases tend to lag actual inflation by many years. Unfortunately, increasing the minimum wage doesn't actually do much to improve the situation of the poorest class of people, it only keeps them from falling further behind then they already have. Each year that inflation marches on (due to the many other factors besides minimum wage that cause it), people at the lowest income bracket get a salary cut. If the world is racing on, you fall behind just by standing still. Thus increasing their wages is more analagous to releasing back pay than it is to an actual rate hike. Generally, the rest of the population has been seeing their salaries increase at a faster rate (which may not be very fast at all, but still faster than those at the bottom) and bringing the poorest 5% up to par won't hurt the rest of us.
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