While there are reasons for wage-push inflation, the empirical evidence to support them is not always strong. Increases in the minimum wage have historically had a relatively poor relationship with inflationary pressures on prices in an economy.
Why not relate the minimum wage to the rate of inflation?
- With current moves to raise the federal minimum wage to $15 per hour, raising the minimum wage has been an issue for decades.
- There are differing perspectives on whether increasing the minimum wage causes inflation.
- According to some economists, boosting the minimum wage artificially causes labor market imbalances and contributes to inflation.
- Other economists point out that in the past, when minimum wages were raised, inflation did not follow.
Is the minimum wage inflationary?
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.
In 2022, how would the minimum wage be adjusted for inflation?
President Biden stated at his State of the Union address that bringing inflation under control was a primary goal, and he told businesses, “Not your wages, but your costs.” However, many firms across the country have not responded to current health or economic problems by decreasing salaries. And, in certain regions of the country, salaries are only going higher by law, as many municipal minimum wage legislation increase their rates in response to changes in the consumer price index (CPI). We present a projection of what businesses can expect during these difficult economic times, not an economic prognosis, so they can budget appropriately in the coming months and prepare for near-term (July 1) and future (January 1, 2023) necessary wage rate increases.
Running a business has been anything but simple during COVID-19. We’ve all heard about the “Great Resignation” and how it led to “wageflation” ( “According to Forbes, “a sudden, unexpected, and instantaneous surge in pay based on unique market conditions”). With the addition of inflation, some businesses may find themselves in an even more vulnerable position. Although the mid-year minimum wage increases (July 1, 2022) are still four months away, some jurisdictions have already announced their rates; the differences are notable and demonstrate the impact rising inflation can have on wages in jurisdictions that adjust their minimum wage in response to changes in the CPI.
The minimum wage in both the City of Santa Fe and the County of Santa Fe was CPI-adjusted from $12.32 to $12.95 per hour on March 1, 2022, an increase of just over 5%. The minimum wage in the District of Columbia will increase from $15.20 to $16.10 per hour on July 1, 2022, representing a nearly 6% increase. The greatest stated increase to date belongs to the City of Los Angeles, California, where the yearly adjusted minimum wage will rise from $15.00 to $16.04 per hour on July 1, 2022, a nearly 7% increase.
Factors that may impact why minimum wage CPI adjustments varies from one location to another range from the apparent to the obscure, and include, for example:
- The minimum pay rate prior to the change. The higher the existing minimum wage, the more likely there is to be a raise “Sticker Shock” is a rate that has been changed.
- The adjustment’s lookback period, as well as inflation throughout that time. There is a gap between the end of the lookback period and the start of the adjusted wage rate, but depending on how much time passes between these dates and how inflation performs in the interim, the rate bump could exceed inflation at the time the rate goes into effect or throughout the year it is in effect; of course, during the pre-adjustment period, the opposite could be true, with other items like food and consumer goods prices rising while the adjusted wage rate remains in effect; of course, during the pre-adjustment
- Whether CPI-U (Consumers) or CPI-W (Workers) is used in the adjustment (Workers). These are various inflation rates, which helps to explain why two cities with the same pre-adjustment minimum wage may have different adjusted rates.
- The adjustment’s working area. To be competitive, a smaller city can go beyond its borders and apply the CPI index to a much larger metropolis further away.
- Whether or not the law sets a limit on the annual rise. This could happen in general or by employing a different rate of inflation than the actual rate of inflation “whichever is less” standard (i.e., the rate of inflation or X percent, whichever is less).
Numerous further municipal mid-year rate adjustments will occur throughout California on July 1, 2022, so businesses should plan for a potential “wagequake” across the state. However, tremors may not be limited to the West Coast, as municipal minimum wage rates in the Midwest (Illinois) and the Mid-Atlantic (Maryland) will also alter. While concerns about near-term wage changes are primarily local, firms across the country should prepare for the potential that inflation does not moderate sufficiently through 2022, resulting in state-level rate increases on January 1, 2023. (or December 31, 2022, in New York). This could effect both exempt and non-exempt employees if it happens. States frequently add a multiplier to the minimum wage to determine the minimum salary required for the executive, administrative, or professional exemption to apply; a state-law inside sales exemption could face a similar minimum wage multiplication scenario. In addition, the state may annually increase the exemption’s minimum hourly rate for specified hourly professionals (or medical in California).
Although we don’t have a crystal ball to look into the future, we may forecast that things will become more difficult, just like wage and hour regulations.
What are the drawbacks of increasing the minimum wage?
- Despite numerous attempts to raise the minimum wage, no bill has ever passed both chambers of Congress.
- Minimum wage supporters claim that reforms are needed to help salaries keep up with rising living costs, and that a higher minimum wage will raise millions of people out of poverty.
- Opponents of raising the minimum wage claim that increased salaries will have various negative consequences, including inflation, decreased company competitiveness, and job losses.
Do rising salaries lead to inflation?
Wage Increases: What Causes Inflation? Inflation is caused by wage increases because the cost of producing products and services rises as corporations pay their workers more. To compensate for the cost increase, businesses must increase the price of their goods and services in order to retain the same level of profitability.
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.
In the United States, what is the highest minimum wage?
The District of Columbia had the highest minimum wage in the United States as of January 1, 2022, at 15.2 dollars per hour. California was the next state to implement a state minimum wage of $15 per hour.
Why is increasing the minimum wage a bad idea?
- The Biden administration wants to increase the federal minimum wage from $7.25 to $15 per hour.
- While a $15 minimum wage may benefit some employed employees, the existing data on the supply and demand side of the labor market suggests that it will price others out of the market and exacerbate the problems faced by many small firms.
- On the supply side of the labor market, Black and Hispanic workers, as well as those with lower educational attainment, are most at risk of remaining unemployed; these groups make up a significant proportion of minimum wage earners and are heavily represented in industries that have been negatively affected by the COVID-19 pandemic.
- Small businesses have been severely harmed by the pandemic on the demand side; at its worst, 41 percent of small enterprises in low-income areas closed, with a 46 percent reduction in sales since January 2020.
As part of its COVID-19 economic assistance package, the Biden administration proposes raising the federal minimum wage from $7.25 to $15 per hour. Some argue that by using the budget reconciliation procedure, Congress might raise the minimum wage with a simple majority vote in the Senate. An rise in the minimum wage, especially one as large as the one suggested, would benefit some workers while excluding others from the labor market. According to labor supply data, there are millions of unemployed employees who are low-skilled and have a low level of education. Because of the $15 minimum wage, many employees are likely to remain unemployed. On the demand side, many businesses are facing declining net revenues and, in some cases, closure; this is especially true of small enterprises already hurt by the COVID-19 crisis, which employ a disproportionate number of those individuals. A $15 minimum wage would not only stifle recovery, but it would also harm many of the employees it is supposed to aid.
The pandemic has had an impact on practically every aspect of the economy, but some industries and people have been hit particularly hard. Knowing which industries and types of workers are the most affected by the present economic environment might help determine where a significant rise in the minimum wage will cause the most harm and potentially result in more people losing their jobs.
While the Biden Administration has stated that it is committed to helping low-income individuals and families, particularly those from Black and Hispanic communities, a federally enforced minimum wage of $15 will disproportionately harm these employees. The pandemic’s destructive impact on communities of color has been extensively studied. For example, black and Latino workers make up about a quarter of the service industry workforce yet are underrepresented in management roles. Black and Hispanic workers make up 13 and 24 percent of the workforce in the leisure and hospitality business, respectively.
** Estimates for the racial groupings listed above
Because data for all races is not supplied, the terms white, black, and African American do not add up to totals. People of any race who identify as Hispanic or Latino might be Hispanic or Latino. I
Although the employment situation for Black and Hispanic employees has improved since the peak of unemployment, these groups remain disproportionately represented among the unemployed. A significant increase in the federal minimum wage could push those who are already unemployed out of the labor market, potentially resulting in more layoffs or job losses.
Those with a lower educational level are another group of workers that are particularly vulnerable. According to data from the Bureau of Labor Statistics (BLS), employees who did not complete high school were disproportionately affected by the pandemic, with unemployment soaring to 21% and remaining roughly double that of 2019. Workers with a bachelor’s degree or more, on the other hand, are seeing their jobless rates rebound to 2019 levels. Workers with lower educational attainment are more likely to work at or below the minimum wage, which is unsurprising. Because up-skilling and reskilling programs are not widely available in the United States, and higher education is sometimes prohibitively expensive, workers with low educational attainment and low skills will most likely feel the effects of increasing minimum wage.
Even as the economy begins to recover, the COVID-19 pandemic has forced many firms, particularly small businesses, to close permanently or function on razor-thin margins. Many of these enterprises are already operating in a difficult climate, having had to absorb expenditures connected with increased safety precautions and state-mandated company closures while losing revenue due to decreased activity.
The expense of a $15 minimum wage might drive the most vulnerable businesses to stop hiring, reduce employee hours, eliminate positions, or close entirely.
When COVID-19 initially began to have an impact on businesses, layoffs were concentrated in industries that required in-person assistance. The leisure and hospitality business, for example, saw 40% unemployment at its height and had the highest proportion of low-wage workers, according to 2019 BLS statistics. Mining, construction, transportation, and food services are among the other businesses that have been severely impacted by the pandemic. While there has been progress, unemployment in these industries remains high.
Given the high concentrations of low-paid workers in these industries, many of whom are now unemployed, raising the minimum wage to $15 would create additional barriers to speedy reopening and rehiring, resulting in long-term unemployment for the least educated and skilled individuals.
Due to a lack of revenue and required closures, the pandemic prompted many small businesses to close temporarily; it also forced numerous enterprises to close permanently. The highest percent change in the number of open small enterprises occurred in April 2020, with a 44 percent decrease from January 2020.
The changes in the leisure and hospitality industry, which showed an almost 50% fall in open small enterprises in April 2020 compared to January 2020, are particularly noteworthy. This industry employs the vast majority of people who would be directly impacted by minimum wage hikes, many of whom are likely currently unemployed.
As previously said, closures due to reduced business and mandates resulted in income loss; while many larger businesses were able to withstand the loss, many small enterprises were forced to close permanently or resort to layoffs as a cost-cutting solution. While the Paycheck Protection Program loans, which were established as part of the Coronavirus Aid, Relief, and Economic Security Act, brought temporary relief to many, businesses are still struggling.
Despite an increase in revenues from April to December, the status of the leisure and hospitality business remains fragile, particularly as the number of cases continues to rise.
Given that the typical non-supervisory wage in the leisure and hospitality industry is less than the proposed $15 minimum wage, these businesses would have to manage the impact of increased costs, which would reduce net revenue even further. Many small firms would be forced to raise prices, limiting demand for goods and services, or reduce hiring, cut worker hours, or eliminate positions if the minimum wage was raised.
An rise in the federal minimum wage will worsen the economic loss already experienced by many firms and their employees. While those who are able to keep their jobs will undoubtedly profit from the raise, many others will suffer further consequences. The enormous number of unemployed people who previously worked as low-wage workers in businesses that have been hit the hardest by the pandemic are particularly vulnerable. It’s unclear whether those personnel will be required to return during this period. As firms balance reduced revenues and increasing expenditures, adding a federally required cost in the form of an increased minimum wage would result in extended unemployment, reduced work hours or hiring, and increased layoffs for low-paid workers.
https://www.bls.gov/news.release/empsit.t04.htm; https://www.bls.gov/opub/reports/minimum-wage/2019/home.htm#cps mw whe char.f.1; https://www.bls.gov/opub/reports/minimum-wage/2019/home.htm#cps mw whe_