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.
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 are the drawbacks of increasing the minimum wage?
Since 2009, the federal minimum wage of $7.25 per hour has remained unchanged. Increasing it would increase most low-wage employees’ earnings and family income, pulling some families out of povertybut it would also cause other low-wage workers to lose their jobs, and their family income would fall.
The Budgetary Consequences of the Raise the Wage Act of 2021 (S. 53), which CBO evaluated in The Budgetary Effects of the Raise the Wage Act of 2021, allows users to study the effects of policies that would raise the federal minimum wage. Users can also build their own policy options to see how different ways to increasing the minimum wage would influence earnings, employment, family income, and poverty.
Inflation, what should the minimum salary 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.
Why should the government increase the minimum wage?
Raising the federal minimum wage will boost consumer spending, boost company profits, and help the economy expand. A little increase would boost worker productivity while also lowering turnover and absenteeism. It would also help the economy as a whole by increasing consumer demand.
Is it a good idea to raise the minimum wage 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.)
Is a higher minimum wage linked to more unemployment?
The rates of the UK’s minimum wage increased on April 1, 2021. Changes to the National Minimum Wage were made for workers aged 22 and younger. This was achieved for persons aged 23 and up by an increase in the National Living Wage (NLW).
The Low Pay Commission proposes new minimum wage rates every year. The National Living Salary has an official government aim of two-thirds of the national median wage by 2024, subject to broader economic conditions. The commission is asked to propose pay that are as high as possible without jeopardizing job prospects for the other rates. One important constraint is that corporations may respond to rising labor costs by replacing low-wage positions with low-cost technology or other capital investments.
In October 2020, in the midst of the epidemic and right before the second lockdown, the commission released their ideas. To avoid a substantial increase in unemployment, modest increases were planned for 2021. Despite their tiny size, the rates are expected to rise faster than prices under the existing strategy. The last 12-month consumer price inflation rate was 0.7 percent, indicating that low-wage employees’ purchasing power is likely to rise.
Workers aged 23 and 24, who are now covered by the National Living Wage, will see an almost 9% pay boost as a result of this increase. This is a significant raise, especially given the current public sector pay freeze and a proposed 1% wage increase for NHS nurses.
How will wages be affected by the minimum wage increases?
In 2020, 1.83 million workers were paid at or below the minimum wage, excluding those on furlough. The rate hikes will have a direct impact on these workers: 48 percent work in retail, hospitality, or cleaning and maintenance. In these industries, 19%, 29%, and 30% of workers are paid at the minimum wage, respectively, and will be directly impacted by the changes (Francis-Devine, 2020).
Workers earning more than the minimum wage may see their salaries rise as a result of the spillover effect. This could be due to firms attempting to differentiate their workers’ salaries.
Assume that a restaurant pays dishwashers 8.72 per hour and waiters 9.00 per hour in March 2021. The restaurant is required to pay dishwashers 8.91, which is only 0.09 less than waiters, as a result of the National Minimum Wage hike in April. They may decide to raise waiter compensation to reflect the differences in expertise and effort necessary for each position. Changes at the bottom of the compensation pyramid, in this scenario, could have an impact on wages throughout the board, as the company strives to maintain pay distinction.
Despite evidence of favorable spillover effects at the lower end of the income distribution (particularly for the bottom 30 percent), the current health of the economy is likely to weaken wage pressures (Avram and Harkness, 2019). The lack of such effects higher up the income distribution, on the other hand, shows that raising the minimum wage can help reduce wage disparity.
What does the evidence say about the potential consequences of increasing the National Minimum Wage?
The conventional wisdom holds that raising the minimum wage will result in an increase in unemployment. However, more recent research, such as a well-known analysis of New Jersey’s 1992 minimum wage boost (Card and Krueger, 1994), has found that similar wage hikes result in very minor increases in unemployment.
Even during recessions, two assessments of the evidence (or meta-analyses) for the UK found no substantial total employment effect (Hafner et al, 2016; Leonard et al, 2014). Rather than reducing jobs, firms appear to absorb minimum wage rises through a mix of higher costs, decreased profits, and increased worker productivity (Forth et al, 2020).
According to a recent survey, 21-23 percent of businesses indicated they increased their pricing in response to previous minimum wage rises (Forth et al, 2020). However, the total impact on inflation is anticipated to be minor.
According to one study, a 10% salary increase would result in a 0.23-1.1 percent increase in pricing (Frontier Economics, 2020). However, price increases in industries that employ a large number of low-wage workers, such as domestic services, hotel services, and restaurant or takeaway meals, are likely to be higher (Wadsworth, 2010). A increase in demand for hospitality services such as bars and restaurants could add to inflationary pressure in this sector as the UK continues to undo its lockdown measures.
Similarly, 31-34 percent of businesses report lower profitability as a result of minimum wage hikes (Forth et al, 2020). Evidence from the establishment of the National Minimum Wage in 1999 backs up this claim (Draca et al, 2011). Because of the recent minimum wage rise, 30% of members of the Federation of Small Businesses expect to have to cut their revenues (Low Pay Commission, 2020).
However, the epidemic and the third lockdown may have had a significant influence on low-wage enterprises’ ability to absorb change. Only about a fourth of hospitality workers were furloughed when the Low Pay Commission recommended the increased wages in October 2020. This is down from 56 percent in January 2021. (Hutton and Foley, 2021).
Firms in an industry like hospitality, which has the greatest proportion of companies with less than three months of financial reserves and a moderate to severe risk of insolvency, may be unable to lower profits any further without going bankrupt (Low Pay Commission, 2020).
Another important element is productivity: 24-26 percent of businesses report higher productivity as a result of minimum wage increases (Forth et al, 2020). Although there is little solid evidence, employers may invest more in employee training if they ‘cost’ more. Employee morale may be improved by higher salaries, causing them to put in more effort this is the ‘efficiency wages’ argument.
Employers may not be able to raise productivity, but they may be able to increase work intensity the range and breadth of work that employees are required to complete which is not sustainable and may have an impact on employee well-being.
What are the takeaway points from a rise in the minimum wage?
Given the peculiar economic conditions brought on by Covid-19, determining the impact of minimum wage rises is particularly difficult. However, the increase will be good news for low-wage workers who are currently employed. Real salary improvements are expected for this cohort, notably for 23-24-year-olds, whose incomes could rise by as much as 9%.
However, industries with a higher proportion of low-paid workers, such as hospitality, retail, and cleaning and maintenance, have been particularly hard hit by the lockout, diminishing their ability to absorb pay rises through decreased profits. However, the actual impact of the minimum wage on these industries may not be felt until September, when the furlough program, which is keeping many of these businesses viable, expires.
Even during recessions, evidence suggests that increasing the minimum wage has no negative impact on employment. Because businesses may not be able to lower earnings any further, it’s likely that they’ll modify their prices and look into how to make their staff more productive in response to the minimum wage increase.
Where can I find out more?
- The Low Pay Commission Report 2020: An in-depth look at the current situation of the labor market, low-paid workers, the minimum wage, and economic forecasts.
- A meta-analysis evaluating the influence of the National Minimum Wage on employment: This paper examines previous UK studies on the impact of the National Minimum Wage on employment.
- Increases in the minimum wage’s impact on wage growth and wage distribution: The Low Pay Commission commissioned Silvia Avram and Susan Harkness to write a report in 2019 that looks at how raising the minimum wage affects salaries.
- Minimum wage effects: a review of the international evidence: The UK government commissioned this analysis by Arindrajit Dube to analyze the consequences of minimum wage rises in various nations, with an emphasis on the United States and the United Kingdom.
- The elusive employment effect of the minimum wage: Alan Manning’s study focuses on American teens to highlight the employment effect of the minimum wage.
Is the United Kingdom’s minimum wage linked to inflation?
Since their inception in the United Kingdom, the national minimum and living wages have risen every year. However, this does not imply that they have kept up with rising living costs.
Chancellor Rishi Sunak announced an increase in the national living and minimum wages in his Autumn Budget, declaring that the higher rates “guarantee we’re making work pay and maintains us on track to reach our commitment to abolish low pay by the end of this Parliament.”
Every country in the globe has its own system for determining the minimum wage, as well as the amounts that should be paid to different age groups.
Some countries have a minimum pay per hour, whereas others have a minimum wage per working day, week, or month. Many countries still do not have any kind of minimum wage at all.
In general, the national minimum wage in this country rises by roughly 4% per year, in accordance with inflation rates. If the minimum wage does not keep pace with inflation, people will grow poorer despite earning the same amount of money.
Naturally, different countries have varying living costs, inflation rates, and average wages. But, in the broader scheme of things, how does the United Kingdom fare? And who has the world’s highest minimum wage?
What causes price increases?
- Inflation is the rate at which the price of goods and services in a given economy rises.
- Inflation occurs when prices rise as manufacturing expenses, such as raw materials and wages, rise.
- Inflation can result from an increase in demand for products and services, as people are ready to pay more for them.
- Some businesses benefit from inflation if they are able to charge higher prices for their products as a result of increased demand.
What state’s minimum salary is the lowest?
Georgia ($5.15) and Wyoming ($5.15) have the lowest minimum wage in the country. Employers subject to the Fair Labor Standards Act in Georgia and Wyoming, on the other hand, must continue to pay the $7.25 federal minimum wage.
Why are the majority of economists opposed to increasing the minimum wage?
A decade ago, a $15-per-hour minimum wage appeared impossible even liberal economists and The New York Times warned of catastrophic consequences. However, it began to be enforced in a few large cities, and it eventually became part of the Democratic Party platform. It now has a strong probability of becoming federal legislation.
The majority of the study reveals that the trade-offs aren’t worth it. While the research on the consequences of minimum wage increases isn’t as conclusive as it once was, economists still believe they are a terrible idea. According to a poll, the majority of economists reject a federal minimum wage of $15. The Congressional Budget Office (CBO) estimates that it will cost 1.7 million jobs while increasing overall salaries by no more than 1%.
It will not assist people who are poor. Many supporters of raising the minimum wage believe it benefits the poor, yet it does not. The majority of people who make low salaries do not live in poverty; in fact, the majority live in households with incomes higher than the average in the United States. That’s because they’re usually the family’s second (or third, or fourth) earner, not the principal one. The majority of impoverished people do not work at all, and only 10% of adults in poor homes work full time. Even more liberal economists, as well as some supporters of minimum wage laws, admit that raising the minimum wage is unlikely to reduce poverty rates. A raise in the minimum wage will not benefit those who are poor; in fact, it is likely to make it more difficult for them to find work, which is the only way out of poverty.
It is unlikely that salaries for the lowest-paid workers will be increased. A greater minimum wage does not create money; rather, it moves it about. According to the CBO, a $15 minimum wage will increase pay for some workers while also causing layoffs for others, resulting in a net loss of income. The lowest-skilled workers are also the lowest-paid, and they will bear the brunt of the repercussions. The American Enterprise Institute compared low-paid workers’ earnings in states that raised their minimum wage to those in states that did not, finding little or no difference in pay growth between the two groups of states. In other words, low-wage workers’ earnings climbed at the same rate in states that did not raise their minimum wage as they did in states that did. Wages rise as a result of broad-based economic growth rather than government mandates.
It obliterates entry-level positions. The real worth of a minimum wage work isn’t in the money; it’s in the experience and skills obtained, as well as the stepping stone to the next employment. Raising the minimum wage reduces the availability of these types of occupations, limiting the number of people who can gain these critical skills. This primarily affects low-skilled workers and low-income families, who are the most in need of fresh job prospects.
It will increase prices for those who can least afford it. Higher minimum wages are frequently supported by large corporations and high-end eateries. That may sound strange at first, but when you examine their competitive environment, it makes sense. Large corporations are better able to bear these mandatory expenditures and invest in innovative technology that reduce their reliance on human labor. Small businesses competing with these firms cannot say the same, therefore when governments boost costs, big businesses win in the end.
It eliminates important worker protections. Because these government pay demands damage these workers the most, and they tend to be the first ones laid off or not recruited at all, the present minimum wage law makes restricted exceptions for juveniles and individuals with disabilities. Tipped employees, typically servers and bartenders, are currently permitted to deduct tips from their pay. For tipped employees and those with impairments, the Biden plan would eliminate these benefits, resulting in increased unemployment and lower compensation overall.
The $15 federal minimum wage supporters identify a simple problem (“People don’t make enough money!”) and propose a simple solution (“Force companies to pay them more!”). “There are no solutions; only trade-offs,” stated the famous economist Thomas Sowell. We must examine the trade-offs in all public policy decisions, and the trade-offs for a $15 federal minimum wage law will make us worse off.