Category: 

Does Raising the Minimum Wage Cause Inflation?

Labor unions routinely campaign for increases in the minimum wage.
Article Details
  • Written By: Michael Pollick
  • Edited By: Bronwyn Harris
  • Image By: Kheel Center
  • Last Modified Date: 06 April 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Artists tend to grow up in wealthier households than doctors.  more...

April 24 ,  2005 :  The world's first cloned dog was born.  more...

It is not always easy to obtain objective information when it comes to a politically charged issue such as raising the federal minimum wage. Proponents and critics alike tend to bolster their positions by publishing the opinions of economists who share their political bent. Does raising it have a measurable effect on the rest of the economy, including the issue of inflation? Yes. Can a rise in the inflation rate be attributed directly to a rise in the minimum wage? Not necessarily. Both sides of the debate do present persuasive arguments, but these arguments may be based on skewed or purely theoretical assumptions.

There is a relationship between setting the new minimum wage and inflation, but it's more of a cart before the horse situation. Many proponents of a raised federal minimum wage support the idea of matching the new base wage to the current rate of inflation, a process known as indexing. By doing this, proponents believe the wage-earner's real spending power will also be increased. When a wage hike does not keep up with inflation, which has been the case in recent years, the workers' paychecks may get a little larger but inflated prices of goods and services actually reduce the spending power of that raise.

Ad

So we know that inflation can have a detrimental effect on the real spending power, but does a raised minimum wage cause inflation? Yes and no. From an economic standpoint, inflation can be caused by any number of new or increased costs of production, including an increase in workers' wages. If a company must increase the amount it pays its workers by several dollars, there is obviously a new expense that must either be absorbed by the company as the cost of using human labor or passed on to customers in the form of higher prices.

Economists call this phenomenon cost-push inflation. An increase in the federal minimum wage did create an increase in production costs, which subsequently resulted in an inflated price for consumers. But critics of the cost-push inflation argument suggest that companies can always adjust their workforce to compensate for a mandated increase. It isn't always necessary for companies to push the expenses of a higher-paid workforce onto consumers. Raising the minimum wage can create a temporary or artificial bump in the inflation rate, but so can increases in corporate taxes or a shortage of raw materials.

In short, many proponents of a raise ascribe to the philosophy that a rising tide lifts all boats. Whenever minimum wage workers receive a boost in their take-home pay, higher-paid workers also tend to receive similar pay hikes. The rate of inflation is influenced by so many economic factors that blaming one element appears to be very short-sighted.

Ad

Discuss this Article

ettreeseedco
Post 17

Unemployment and Inflation are at the mercy of the Universal Law of Polarity; wages have nothing to do with it. Try for equilibrium and equalize wages worldwide -- no more sending goods to be made in another country because they are held as slaves. Equalize pay for all people globally when you made the new currency.

silverState
Post 16

First, many union contracts are pegged to the minimum wage so that when it goes up, union wages rise, which can be a big deal since most union wages are two or three times the minimum.

Secondly, the jobs that pay minimum wage traditionally have been service jobs when tips can be earned, entry level jobs and part-time and seasonal jobs. If you're earning tips, you don't really need an increase in the minimum. If you don't possess the work ethic or ambition to get promoted out of the minimum wage job, you're probably lucky you haven't been fired. Seasonal and part-time are self-explanatory; they're not intended to be lived on.

anon346669
Post 15

This article mentions cost-push inflation (companies raising prices to recover increased wages) but what about demand-pull inflation -- prices going up simply because much of the population now has more money? Is that a factor in raising the minimum wage?

anon340627
Post 14

It sounds like from this article, that raising the minimum wage either creates inflation or creates unemployment. So, it seems policy wise, that minimum wage is only useful as fool's gold?

anon338483
Post 13

I feel inflation should be represented from the get go. For example, let's take a state which has to pay for state needs. One would think that the state gets its funds directly from the federal government and than it sets a state income tax rate to pay for the loan.

Should this operation be the way to act? Take a business that has the upfront funds to operate. It then creates an income based on the commerce skills it has. This allows the funds to be re-established. The equity is for sure an ongoing process. Inflation was the set amount for the return. When the business notices a better take on the commerce skills (productivity) {supply and demand}, it may then set a different rate as to collect and proceed with more reliability. So the company inflated itself with a number of things: workers, machinery and the space to grow.

More people moved in the area to be in the work force -- again, a form of inflation. But where exactly did the inflation representation begin? It seems that it began with an area to provide with. In the United States of America, security is a key factor to any operational attempt. The survival of a state itself is based on its population.

To pay for state needs and appropriations, it has to set a state tax rate. This to me appears to be a form of income tax rate.

We need representation in order to survive. Otherwise, as an entire, but yet somehow unbalanced society, we will always question why it appears to be threatening the population when poverty levels are higher, again bringing the level of survival to a state need. --David D.

anon327249
Post 12

This is very well written and balanced. Thank you! I also appreciated the comments. To summarize for everyone. Yes, in theory, a rise in the minimum wage will increase inflation, all things being equal.

However, the effects are minimal in reality because so few workers actually make minimum wage and companies can adjust other inputs or could pay their highest earners marginally less to pay their lowest paid workers a little more. And if the most well off among us takes home a just a little less at the end year so the minimum wage workers can take home a little more, it is a price worth paying as a society.

anon321422
Post 11

This, in my experience, is a bold lie: "higher-paid workers also tend to receive similar pay hikes". No one I have ever worked for or with, family and friends ever got an increase because minimum wage went up.

anon320071
Post 10

@anon319477, Post 9: "When do we get a raise?" When your business actually succeeds.

anon319477
Post 9

How about the small business owners who work 80 hours a week for less then $30,000 a year? When do we get a raise?

anon278783
Post 8

An estimated 5 percent of workers earned minimum wage or less (i.e. tipped workers) in 2011, according to the Bureau of Labor and Statistics. The fact of the matter is that an increase in the minimum wage will cause inflation in theory, but all other things being equal, it will be such a small influence that it's virtually negligible.

What raising the minimum wage amounts to is an exceedingly small tax (on the order of a small fraction of one percent) on consumers, in the form of tiny increases in input costs. The result of this exceedingly small tax is that people at the lowest margins of our labor force live a life of slightly less grinding poverty. Seems a fair trade-off to me.

anon150836
Post 7

Explain why it is necessary to consider inflation when examining the minimum wage.

Discuss five ways that you or your family directly benefits from government expenditure.

Identify how national debt can affect economy.

anon105697
Post 5

please help me. I'm trying to prove that wage increases cause inflation to rise.

anon74705
Post 4

Raising wages is a moot point as long as speculators who no real knowledge of market principles are allowed to price out any gains to the wage structure.

anon65748
Post 3

This article, like most, completely overlooks the most important feature of a minimum wage: redressing the balance between high earners and low earners.

For example, the Waltons each year currently earn seven hundred thousand times what their average worker makes in a year. A minimum wage might mean that the poor Waltons would have to settle for making only six hundred thousand times what their average worker makes in a year without the price of anything having to be adjusted in the slightest.

anon36969
Post 2

Whenever minimum wage workers receive a boost in their take-home pay, higher-paid workers also tend to receive similar pay hikes. The rate of inflation is influenced by so many economic factors that blaming one element such as a raise in the minimum wage appears to be very short-sighted.

It seem the argument here is that lots of things cause inflation, so who cares? The point is that if raising the minimum wage increases inflation then the newly found buying power is eroded and if the solution it to have regular hikes in the minimum wage then basically we are feeding an inflation fire.

anon19017
Post 1

"...critics of the cost-push inflation argument suggest that companies can always adjust their workforce to compensate for a mandated minimum wage increase." So the inflation can be prevented by increasing unemployment? Would it not be better to make slightly less than to have no job at all?

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email