American fast restaurant employees began requesting a $15 minimum wage per hour in the 2010s. A typical minimum-wage worker might make almost $30,000 a year if their request is granted and the federal minimum wage is raised to $15 an hour.
On the subject of whether raising the minimum wage causes inflation, there are divergent opinions. To better comprehend the influence of raising the minimum wage on pricing, let’s examine the broad macroeconomic effects of doing so.
Wide-ranging Effects of Minimum Wage
When assessing how minimum wage law affects a country’s economy, there are many different aspects to take into account. Understanding different ways that the minimum wage affects an economy is vital before focusing on inflation especially since these effects may also have a lasting effect on prices.
The minimum wage affects workers’ psychological well-being and productivity. Employee effort and morale are positively connected with salary satisfaction, according to a 1990 Oxford University Press research by George Akerlof and Janet Yellen. When employees are happy with their pay, they put forth more effort.
There are non-financial effects of a minimum wage, even though the complete effects of harder workers cannot be properly evaluated throughout an entire nation’s economy.
A minimum wage may also have lingering effects over time that are not always as obvious as inflation. For instance, a 2012 study by Arindrajit Dube, William T. Lester, and Michael Reich examined how market friction, labor movement, and job transitions are affected by the U.S. minimum wage. They discovered that a higher minimum wage may reduce the number of job changes.
A business may ultimately need to increase its prices to cover the additional costs of hiring new employees, which include the high cost of talent acquisition, employee onboarding, and training. Additionally, staff shortages brought on by employee turnover may result in a decline in manufacturing, production, and overall product supply (thereby further increasing the price of the product).
The case both for and against
It is not always clear how the minimum wage affects inflation because of its wide-ranging effects. Whether or not the minimum wage drives up inflation is a topic of debate on both sides.
Position: Minimum Wage Inflation Rises
Many economists think that raising the national minimum wage will result in higher inflation. Here are several justifications for the viewpoint.
According to economists, setting the minimum wage too high results in an artificial floor being created in the labor market, which can lead to distortions and inefficiencies. Their justification is that someone would be willing to work a job for $10 per hour in a free labor market. However, because the government requires an hourly wage of at least $15, a worker cannot reasonably offer less for the task, which will increase the cost of the final product.
When it comes to inflation, a general increase in salaries leads to what is known as “wage push inflation.” This hypothesis states that employers must raise their pricing for the goods and services they offer in order to sustain corporate profits following an increase in wages.
The cost of goods and services has increased overall, which has a cascading effect on wages; eventually, when the cost of goods and services rises overall, greater wages will be required to cover the rising costs of consumer items.
Some people think that small firms unable to meet the financial demands of increasing costs would disappear if the minimum wage were raised. small companies.
With no change in product demand, the closing of several small enterprises could consequently diminish the availability and supply of products. As a result, consumer prices might gradually rise.
When contrasting businesses that rely on foreign imports or foreign labor, the greater chance of business shutdown is a problem. With the minimum wage increasing, businesses can feel more pressured to look for ways to reduce costs, such investigating lower wage choices. This might have a negative effect on the product’s availability or quality, and it might also have an effect on the price.
Position: The Minimum Wage Does Not Raise Inflation
Although there are justifications for wage-push inflation, the empirical support for these justifications is not always convincing. In the past, there hasn’t been much of a correlation between minimum wage rises and pricing pressures in an economy.
For instance, from 1978 to 2015, researchers from the W.E. Upjohn Institute for Employment Research looked at the impact of pricing on minimum wage hikes in different U.S. states. Compared to earlier research, they discovered that “wage-price elasticities are substantially lower: we find prices expand by 0.36 percent for every 10 percent increase in the minimum wage.” In addition, price rises in response to minimum wage increases typically take place in the month the increase is put into effect rather than in the months prior to or following.
There could be several causes for this. A higher minimum wage might be offset by increased employee productivity or staff reductions at a corporation. For instance, a 2010 study by Laura Bucila and Curtis J. Simon indicated that raising the minimum wage lowers absenteeism rates and the number of absences from work that are not due to illness.
As a result of having to pay higher wages, employers may hire fewer workers, which might increase unemployment since workers who might have been ready to work for less money are not taken on. According to economic theory, inflation would fall as there would be less demand for goods as unemployment increases and discretionary spending power declines.
How Does Inflation Affect Minimum Wage?
Analyzing the connection between the minimum wage and inflation involves a number of intricate considerations. The argument that a minimum wage has had little effect on how businesses set their prices and does not significantly contribute to inflation is supported by historical data. Due to their operating region, industry, or labor mix, some businesses may discover there are secondary or downstream effects of raising wages.