Does An Increase In Minimum Wage Cause Inflation?

As inflation reaches historic highs, lawmakers and analysts are debating the causes, which include pandemic-related shocks as well as government-imposed limitations and swings in consumer demand.

One New York Times writer remarked this week on Twitter that recent media headlines about inflation are “all hype.” “Policies like the $15 minimum wage” are blamed by “wealthy people.” Instead of being justified in her concern over fast rising prices for everyday items, she claims the recent coverage is “hysteria,” implying that inflation benefits lower-income people since “inflation helps borrowers, and that’s what the fuss is about…not milk prices.”

Minimum wage increases in the past have been shown to induce price increases, which disproportionately affect lower to middle-income persons who spend a bigger amount of their wages on inflation-affected commodities like groceries.

The snowball effect between minimum wage hikes, such as the $15 per hour now in place in numerous states and localities and proposed at the federal level this year, and price increases is documented in a report by Heritage Foundation fellow James Sherk. A $15 federal minimum wage, for example, represents a 107 percent increase over the current federal minimum pay of $7.25 per hour. Employers must adjust their business models to accommodate for the increased labor expenditure when governments enforce substantial minimum wage increases. In many circumstances, this necessitates firms raising consumer pricing to compensate for the higher cost of providing their goods or services. Sherk claims that this hurts minimum wage workers and lower-income consumers the most, because the costs of the products they buy have climbed as well, lowering their newly boosted salaries’ purchasing power.

According to one analysis of the existing minimum wage research, which mostly contains data on price effects from the United States, a 10% rise in the minimum wage raises prices by up to 0.3 percent.

According to one of the studies evaluated by the American Enterprise Institute, the same price boost might produce price rises of up to 2.7 percent in the southern United States, where living costs and earnings are much lower. Recent study also suggests that increased minimum wages have a greater inflationary impact on employers of minimum wage earners. A research by the Federal Reserve Bank of Chicago and the United States Department of Agriculture indicated that raising the minimum wage more than doubled the price increase effect in fast-food restaurants, and much higher in lower-wage areas.

In addition, a Stanford University economist looked at the impact of price hikes by income level and discovered that while “Minimum wage workers come from a wide range of socioeconomic backgrounds, and raising the minimum wage has the greatest impact on the poorest 20% of households.

Minimum wages encourage firms to raise prices to cover some of the additional pay bill, according to this analysis of previous findings. However, this comes at a price employers must be careful not to raise prices too much, as this will generate price-sensitive client demand. Employers are unable to raise prices if they believe that doing so will reduce demand and result in decreased revenues, which will not be sufficient to fund increases in employee wages. Employers are obliged to adjust costs in other ways if this happens, such as lowering other employee benefits, reducing scheduled hours, or laying off staff entirely.

Sherk claims that the price hike effect of rising minimum wages is combined with large job loss effects, implying that minimum wage people are more likely to lose their jobs or have their hours decreased as their cost of living rises. As a result, he believes that increasing minimum wages is an unproductive approach to provide benefits to low-wage workers due to inflationary and job-killing impacts.

Does increasing wages lead to inflation?

Is Wage Inflation a Common Cause of Inflation? Since its inception, research has disproved wage-push inflation’s hypothesized function as a source of inflation. Higher wages do not lead to higher prices or inflation; rather, higher prices lead to higher incomes.

When the minimum wage is raised, what happens?

Another potential benefit of raising the minimum wage is a boost to economic growth, as consumer spending normally rises in tandem with wages. Millions of workers would have more discretionary income as a result of a higher minimum wage, which would go to retailers and other businesses.

What does wage inflation entail?

Wage inflation is defined as an increase in nominal wages, which means that workers are paid more. Wage inflation usually leads to price inflation and increased growth. The impact of wage inflation is determined by whether it is a real (greater than inflation) or a nominal (lower than inflation) increase (same wage increase as inflation). The impact is also influenced by labor productivity.

Workers notice a boost in their living standards when real wage growth exceeds inflation. (For example, 2006-2007)
When inflation outpaces wage growth, workers’ living standards plummet (negative real wage growth) (e.g. 2010-2014)

Based on inflation, what should the minimum wage be?

Consumer prices rose 5.3 percent in August compared to the previous year, causing some anxiety as the economy recovers from the pandemic. Food prices at home increased by 3%, while food prices away from home (i.e. restaurants) increased by 4.7 percent, according to the Bureau of Labor Statistics’ latest release this week. Rents and energy prices both increased by roughly 9%.

One point of worry for employers and employees in the United States is that activists frequently exploit inflation data to support their campaign for a $15 minimum wage, or even a higher salary of $23 per hour, despite the fact that study shows such steep rises will destroy millions of jobs.

Remember, if we kept up with inflation, the minimum wage would be $23/hr right now. $15 is a good middle ground. #RaiseTheWagehttps://t.co/44l6Rqln0F

Despite the fact that inflation has risen dramatically in the last year, the so-called “The Fight for $15” is still not based on a consumer price index. If the 2009 federal minimum wage increase to $7.25 per hour were indexed to climb with inflation, it would equal $9.22 today, according to Bureau of Labor Statistics data up to August 2021.

If the minimum wage were to be adjusted to the level in 1990, it would be $7.17 now. No matter how you slice it, these data don’t even come close to, let alone support, the $23 hourly rate proposed by the union-backed One Fair Wage.

Indeed, the $15 minimum wage goal that several states and municipalities have already enacted has no precedence in history. An organizing director for the Service Employees International Union’s Fight for $15 campaign joked about the absence of genuine analysis informing their main policy goal at one meeting, saying: “We decided that $10 was too low and $20 was too much, so we settled on $15.”

Unfortunately, these draconian minimum wage targets, which lack economic justification, will wreak havoc on firms and employees as they try to recover from the pandemic. According to the impartial Congressional Budget Office, the Raise the Wage Act of 2021, which proposes a $15 minimum wage nationwide, may cost the country up to 2.7 million jobs. According to economists from Miami and Trinity Universities’ industry and state-level analyses, the hospitality and restaurant industries would bear the brunt of these effects. Increases above the $15 minimum wage would have an even bigger negative impact on employer costs, and could result in the loss of many more employment.

Is it good or bad to raise the minimum wage?

Democrats are sticking to their plan to raise the federal minimum wage to $15 per hour. They want to include it in the next stimulus package, but the Senate parliamentarian says it can’t be done through the budget reconciliation process. So, while it might pass in the House, it’s likely to be dropped from the Senate bill.

Now, lawmakers are proposing a “Plan B”: taxing corporations with $1 billion or more in income if they don’t pay their workers a $15 salary. Senator Josh Hawley, a Republican, proposed the bill (MO).

Some Republicans have expressed support for increasing the federal minimum wage to $15 per hour, but not to that level. Senators Mitt Romney (UT) and Tom Cotton (AR) proposed a four-year plan to raise the minimum wage to $10 per hour, but employers would have to certify that their employees are legally documented. According to a 2019 CBO assessment, raising the federal minimum wage to $10 per hour would have far fewer consequences on employees than raising it to $15 per hour, and would have no effect on the number of people living in poverty.

Why is it that increasing the minimum wage is a poor idea?

The implications of a pricing floor are fairly well understood in economic theory. As shown in Figure 1, the quantity of employment needed is Ec at the market clearing wage rate (Wc), where labor supply matches demand. When a minimum wage law is passed, however, earnings below Wm become illegal. As a result, the amount of labor required decreases from Ec to Em.

So, what are the consequences of raising the minimum wage? The solution is obvious to any Econ 101 student: As a result of the increased wage, the amount of labor requested decreases, resulting in unemployment.

This is one of the reasons why 72 percent of economists in the United States reject a $15.00 per hour federal minimum wage. The Employment Policies Institute conducted a poll of 166 economists in the United States in 2015. They discovered:

A federal minimum wage of $15.00 per hour is opposed by nearly three-quarters of these economists based in the United States.
A $15.00 per hour minimum wage, according to the majority of economists polled, will have negative consequences on adolescent employment (83 percent), adult employment (52 percent), and the amount of jobs available (76 percent ).
When asked how a $15.00 per hour minimum wage would affect the skill level of entry-level positions, eight out of ten economists (80%) believe companies would hire entry-level positions with higher skills.
When economists were asked how a $15.00 per hour minimum wage would affect small businesses with fewer than 50 employees, nearly seven out of ten (67%) said it would make it more difficult for them to stay in business.
The Earned Income Tax Credit (EITC), according to the majority of economists surveyed (71 percent), is a very efficient way to handle the income needs of disadvantaged families; only 5% feel a $15.00 per hour minimum wage would be very efficient.
The economists polled are split on the influence a $15.00 per hour minimum wage would have on poverty rates as well as spending levels for government programs like the EITC, TANF, and others.
At lower levels of proposed federal minimum wages (under $11.00 per hour), economists are divided largely by self-identified party identification as to what rate is acceptable, with a majority of Republicans and Independents favoring lower minimum wages ($7.50 per hour or less) and a plurality of Democrats preferring a minimum wage between $10.00 and $10.50 per hour.

“If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions,” Winston Churchill said. The $15 minimum wage is exempt from this rule.

What are the disadvantages of a minimum wage?

The potential benefits of increasing minimum wages stem from greater salaries for affected workers, some of whom come from low-income or impoverished households. A higher minimum wage could have the unintended consequence of discouraging businesses from hiring the low-pay, low-skill workers who are the target of minimum wages. If minimum wages limit the employment of low-skill employees, they are no longer a “free lunch” for poor and low-income families, but rather a trade-off between advantages for some and costs for others. Although research findings are not universal, evidence suggests that minimum wages diminish the number of employment accessible to low-skill employees, particularly in the United States.

What makes the $15 minimum wage so bad?

Opponents of raising the minimum wage to $15 believe that it will increase labor expenses for small businesses, which account for 99 percent of all employers, resulting in layoffs, automation, or closure.

Why should the minimum wage be increased to $15?

Legislators submitted the “Raise the Wage Act of 2021” in January 2021, with the goal of raising the federal minimum wage from $7.25 per hour to $15 per hour by 2025. It would be the first hike in more than a decade, and the longest since 1938, if passed.

Many state and local governments have already established a $15 minimum wage, while the federal minimum wage has stayed unchanged. (In 2014, for example, Seattle mandated that employers gradually raise their minimum wage until it hits $15 per hour.) Seattle’s minimum wage will be $16.69 per hour in 2021.) Nonetheless, such a huge change at the federal level will undoubtedly be controversial and hotly disputed.

Advantages

Raising the federal minimum wage to $15 per hour would help low-income people improve their overall level of life. These workers would be able to cover their monthly expenses more readily, such as rent, car payments, and other household costs. “Today, a full-time worker cannot afford a basic, two-bedroom apartment in any county in the United States,” said Representative Robert Scott, leader of the House Committee on Education and Labor. Senator Bernie Sanders has also stated that the minimum wage should be $15, as he feels that full-time workers should not be forced to live in poverty.

A second, less visible benefit of hiking the minimum wage has been proposed: improved staff morale. Not only will happier employees make for a more cohesive and effective workforce, but they may also increase customer satisfaction. Furthermore, if employees are happy with their jobs and compensation, they are less likely to leave, which saves the company money on hiring and training.

Proponents say that raising the minimum wage to $15 will assist women and minorities. A $15 minimum wage would improve the pay of 31% of African Americans and 26% of Latinos. Furthermore, a disproportionate number of minority workers live in one of the 21 states with a $7.25-per-hour minimum wage.

Disadvantages

Small firms, according to opponents of raising the minimum wage, would suffer as a result of such a significant increase. An rise in the federal minimum wage will dramatically increase small businesses’ operating costs and tighten profits, just as they are beginning to recover from the international Covid-19 outbreak.

Raising the minimum wage to $15 would also boost daycare expenditures by 21% on average in the United States. In 2019, the average hourly wage for an early childcare worker in the United States was $11.65. As a result, a nationally enforced $15 minimum wage would nearly triple the cost of labor for childcare providers.

Advocates on both sides will continue to cite several reasons in favor of their viewpoints as the federal minimum wage debate continues to elicit passionate opinions. Those who oppose a minimum wage claim that market forces should be in charge. If there is a lot of competition for talented personnel, a business may have little choice but to raise salaries to keep staff. Employers and employees should be aware of both sides of the issue and prepare for a change in the federal minimum wage law that is almost certain to occur.

(This article was greatly aided by Logan Adams, a spring clerk in our Dallas office.)

What does a $15 hourly wage entail?

The aim declared by Congress when the Fair Labor Standards Act was adopted in 1938, that workers get pay sufficient to support “the basic standard of living necessary for health, efficiency, and general well-being,” has been lost ground in America. In 1968, the federal minimum wage was the most valuable. It was worth $10.51 in 2012 USD at $1.60 per hour. The federal minimum wage, which is currently $7.25, is worth 31% less. Wage attrition is something that most people deal with on a daily basis:

In the city of Los Angeles, three-quarters of full-time workers earn less than equivalent workers 30 years ago.
Workers in the bottom half of the wage spectrum experienced the most wage decline. Annual salary for workers in the 50th percentile the median or typical worker fell 14% between 1979 and 2011, and 26% for workers in the 25th percentile the working poor between 1979 and 2011.
In 2013, the average hourly wage for all workers in the City of Los Angeles was reported to be $27.85, resulting in an annual wage and salary worker earning $58,244 on average.
In Los Angeles, 46% of wage and salary workers earn less than $15 per hour. This includes 41% of the city’s 1,097,000 full-time employees and 54% of the 665,000 part-time employees.

Worker Impacts

The central question is whether workers should receive a substantial enough part of the value they create through their job to afford a basic quality of living. There is a reasonable chance that raising the minimum wage will result in the following five outcomes:

Instead of going to stockholders in other cities, more money will stay in Los Angeles.
Low-wage workers who receive pay raises are likely to spend the entire amount households earning $30,000 to $39,999 spend 106 percent of their pre-tax income. Households earning $70,000 or more, which comprise the majority of stockholders, spend only 63 percent of their pre-tax income. When money is in the wallets of lower-income workers, more spending and economic stimulus happens than when it is in the pockets of higher-income investors.

A living wage is conservatively defined at $15 per hour, based on the Fair Labor Standards Act’s definition of a pay sufficient to sustain a family “The bare minimum of living conditions required for good health, efficiency, and general well-being.” Full-time employment, according to the Census Bureau, is defined as working 35 hours or more per week for 50 weeks or more per year. As a result, a full-time worker earning $15 per hour would earn at least $26,250 per year.

In 2013, full-time employment at $15 per hour generates an income that is about twice the poverty level, depending on family size. This is a minimum requirement “In a high-cost city like Los Angeles, “well-being” is a relative term.

With a $15 minimum wage, Los Angeles employees would earn $7.6 billion more each year. The average full-time, low-wage worker would earn $11,729 more per year if they worked 2,150 hours a year and were paid $9.55 an hour. The average part-time, low-wage worker would earn $6,297 more per year if they worked 1,031 hours per year and were paid $8.89 per hour. A total of 811,000 people would benefit from the pay hike, with 454,000 working full-time and 357,000 working part-time.

Industry Impacts

Businesses will profit from a better-paid, more stable labor force, which will reduce employee turnover and the expenses of recruiting and training new staff. The cost of replacing a worker is estimated to be 30% of their annual wage, so lowering the frequency of worker turnover saves businesses a lot of money.

The majority of full-time, low-wage (less than $15 an hour) employees work in Los Angeles-area retail and service industries. Only 22% of low-wage workers work in industries that transfer products outside of the Los Angeles region, such as manufacturing, wholesale trade, or information (film, internet, and publishing). As a result, four out of every five low-wage workers are doing activities that benefit other Los Angeles citizens but earning insufficient wages to live comfortably.

Raising the minimum wage to $15 per hour would result in a 10% increase in overall payroll for wage and salaried workers. Currently, the payroll is at $77.8 billion. An additional $7.6 billion would be added to the budget.

Raising the minimum wage to $15 per hour will need reallocating 4% of overall industry revenue that is presently being used for other reasons.

Payroll cost increases would be higher in low-wage, labor-intensive sectors. To raise employee compensation, restaurants, hotels, and personal service firms would have to reallocate 14% of their earnings. The nonprofit social assistance sector and administrative support services such as janitorial and security services, as well as temp agencies, would have the second largest impacts, with increased labor expenses equaling 13% of income. Professional and technical services, information, finance, and utilities are high-wage industries with nominal revenue impacts on the order of 1%.

Economic Stimulus

Increased spending boosts local economic growth when workers’ households earn greater money. Their increased spending on groceries, clothing, dining out, health care, auto repair services, and rental accommodation drives additional spending in the local supply chain. Restaurants and retail establishments, for example, would create jobs in the same industries where employees would see salary rises. Workers’ enhanced purchasing power would benefit these industries directly from the higher wages they would be paying.

Increased spending means more sales for local businesses and their suppliers, more jobs for those firms and suppliers, and more tax money for the local, state, and federal governments.

Just looking at the stimulus effects, a $15 minimum wage would generate an estimated $9.2 billion in annual sales in Los Angeles County, and these additional sales would create an estimated 64,700 new jobs in the county to match the increased demand for products and services.

Government and Social Service Benefits

Increased sales and employment would result in an increase of $1.3 billion in annual government revenue. This money would go to social safety net programs in the amount of $331 million. A billion dollars would represent general government revenue, subject to legislative budget allocations at various levels of government.

An estimated 15% of this general public revenue would be returned to the City of Los Angeles, with some coming from the city’s formula share of sales tax revenue, but the majority coming from state and federal budget contributions. This portion of public money would bring the city an estimated $152 million per year.

Pro and Con Economic Debate

By raising the minimum wage, money is diverted from one set of pockets and placed in another. The effect of raising the minimum wage whether it is a damper or a stimulus for employment has been a long-running argument in economic research.

The Fair Labor Standards Act of 1938 specifies a standard for raising the minimum wage: it should not result in significant job losses or inflation. The dispute over whether minor increases in the minimum wage diminish the rate of job growth (rather than actually cutting employment), have little or no effect on employment, or encourage job creation is now virtually over.

Over 650 economists signed a statement stating that federal and state minimum wage increases “can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed,” including five Nobel Laureates and six past presidents of the American Economics Association.

Why does shifting money from firms to low-wage workers not cause an economic downturn? Reductions in labor turnover, improvements in organizational efficiency, and small price increases were found to be the most important channels of adjustment in a review of economic studies on the effects of the minimum wage and the ways in which businesses adjust to wage increases conducted since 2000. Given the cheap cost to employers of minor increases in the minimum wage, these adjustment mechanisms appear to be more than adequate to prevent job losses, even for employers with a high proportion of low-paid workers.

Many economists who believe that raising the minimum wage is not harmful to the economy add the proviso that the increases should be gradual in order to avoid economic disruptions. California’s recent action to raise the minimum wage to $10 per hour will be phased in over time in one-dollar increments.

Increases in the minimum wage should be implemented as part of a system that adjusts the minimum wage automatically to keep up with inflation. This will prevent the dilemma of low-paid workers experiencing significant wage erosion and the requirement for major salary changes to restore parity.

Press Coverage

Alice Walton and Ben Bergman “A minimum wage raise in Los Angeles could affect 4 out of 10 jobs, boosting the economy” 2 September 2014, KPCC News.
Harold Meyerson and Peter Dreier (Op-Ed) “If California and Washington, D.C. refuse to raise the minimum wage, municipal and county officials should go it alone.” The Los Angeles Times published an article on March 30, 2014.
“Confronting L.A.’s Economy, Past & Present,” Vivian Rothstein, Capital & Main blog, March 27, 2014.
James Rainey is a writer. “A pair of strong backers support a bid to raise the minimum wage in Los Angeles” The Los Angeles Times published this article on March 1, 2014.
James Rainey is a writer. “Union commercials aim to raise awareness of L.A. workers earning less than $15 an hour.” The Los Angeles Times is a newspaper in Los Angeles, California. 14th of January, 2014.
Michael Hiltzik, Michael Hiltzik, Michael Hiltzik, Michael Hilt “Will Los Angeles create a precedent for a higher minimum wage?” The Los Angeles Times published an article on the 14th of January, 2014.
Bruce Covert is a writer. “In Los Angeles, a $15 minimum wage could generate 64,700 jobs” Politico and ThinkProgress are two of the most well-known news organizations in the United States. 16th of January, 2014. Discussion on Reddit.
Jorge Rivas, Jorge Rivas, Jorge Rivas, Jorge Rivas “L.A. to Consider the Nation’s Highest Minimum Wage; Latinas Could Benefit the Most,” Fusion, 21 January 2014.
Mark Thoma, Mark Thoma, Mark Thoma, Mark Thoma “What is the most effective strategy to assist the poor?” “Minimum Wage, Earned Income Tax Credit, or Both?” The 21st of January, 2014, according to MarketWatch.