Does Raising the Minimum Wage Cause Inflation?

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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.


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.


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Post 24

First, thanks for this article. Although short, it does give what appears to be a biased view from both sides of the field. With all the hoopla of increasing everything, how about lower the price of products back to where people can actually afford them without having to decide between meds or milk. Sounds easy to me. Yet I'm sure there is some analytical reason on why that can't be done. Just like there's some analytical reason why gas keeps going up when someone sneezes.

When you read between the lines of what I'm saying, it all boils down to greed. Someone somewhere feels they will make less than the next (keeping up with the Joneses). Ask yourself: how much does one really need to live and be happy? Do you really need billions on billions? Last time I checked when a person dies, no matter how much they have, they still get 6ft of dirt to their name.

Post 23

I love how you guys all say that companies will absorb the cost of higher paid wages. Give me the names of five companies that have absorbed the cost of their lowest earners being paid more by lowering the salaries of those in control. Seriously, I'll wait. Sure as hell isn't Wal Mart. The Waltons still make the same billions whether the lowest earners get 6, 8, or 10 dollars an hour. Even non-profit businesses don't have such saintly virtues.

Unless companies are mandated by law to not raise prices and can provide extremely reliable evidence that raised prices are due to other factors, violators should be violently penalized. No one I've ever heard of has had a pay increase

because of raised minimum wage unless they themselves were making it. Saying raising minimum wage is the answer to most of our prayers for the well being of the poor is highly dubious and extremely hilarious. Raise prices or reduce labor. Those are the only realistic outcomes of wage hikes.
Post 22

Nowhere in this article does it address the effect of inflation on those who do not work. Indexing minimum wage to avoid the effects of rising prices doesn't help retirees or those that cannot find work. The CBO recently determined that minimum wage increases DO eliminate jobs. Those without jobs and on fixed incomes have no way to counter the effects of inflation.

Additionally, if prices rise, forcing an increase in the minimum wage, this produces an endless cycle of chasing real dollars where those earning minimum wage rarely see any real dollar benefit. If real dollar buying power is say 100, and minimum wage is increased to produce 110, inflation will reach 110 in short order, forcing a minimum wage of 120, which then triggers inflation to 120, etc etc. Meanwhile those on fixed incomes stay at 100 and get left behind.

Post 21

I have a thought, although I am not really answering the question being asked.

Why don't we pay workers with real products, such as breads and veggies and meat that they need, bypassing the use of money totally? After all, no money involved means no inflation. And workers did put in time to do work and to produce something, so they deserve to be rewarded by real-life things.

Just a thought. I think this is one way of defeating inflation.

Post 20

Question: how many CEO's take a pay cut to pay the lowest wage worker more? I have never heard of any major company where the stockholders and top paid workers get paid less to pay the lowest earned worker more.

I think it would be a fairy tale to think any company would willingly make less, just to pay the least skilled worker more. If minimum wage gets raised, the price of the output product will also raise to compensate. The oil/gas industry makes billions. If they raise the minimum wage, do you really think the price of gas will stay the same or even go down?

Fact: Minimum wage was never designed to support a family. It was designed for young people joining the workforce. As they become more skilled, the pay increases.

Post 19

I am on the upper end of the lower tax bracket. When the minimum wage increases, my income does not increase. When the dollar de-values and the cost of living is up again, the minimum wage may increase again. When the value of the dollar goes down, and the minimum wage earners get an increase, my dollar earned still does not adjust and I have less to spend, compared to the lowest wage earners.

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.

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.

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?

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?

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.

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.

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.

Post 10

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

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?

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.

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.

Post 5

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

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.

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.

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.

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?

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