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.
What causes inflation when salaries rise?
Wage-push inflation is an economic hypothesis that posits that rising wages cause inflation. According to the hypothesis, rising wages will cause businesses to increase the price of their final items, resulting in inflation.
Will prices rise as the minimum wage rises?
Many business leaders believe that any increase in the minimum wage will be passed on to consumers in the form of higher prices, stifling spending and slowing economic growth, but this may not be the case. According to new study, the price pass-through impact is transient and far smaller than previously anticipated.
Daniel MacDonald and Eric Nilsson of California State University, Bernardino, expand the literature on the pricing implications of minimum wage rises in a new Upjohn Institute working paper.
Minimum wage increases have often been big, one-time modifications imposed with minimal previous notice to businesses. However, many recent minimum wage hikes at the state and city levels have been phased in over time and are frequently related to some measure of price inflation. Small, regular minimum wage increases appear to have less of an impact on prices than massive, one-time increases.
MacDonald and Nilsson examine changes in restaurant food pricing from 1978 to 2015 and find that prices climbed by only 0.36 percent for every ten percent increase in the minimum wage, which is less than half the amount found in earlier studies. They also point out that tiny increases in the minimum wage do not necessarily result in higher prices, and may even result in lower prices. Furthermore, small increases in the minimum wage may contribute to an increase in employment in low-wage labor markets.
While the impacts of federal and state minimum wage hikes appear to be similar, additional research is needed to completely understand the consequences of city minimum wage increases.
Read Daniel MacDonald and Eric Nilsson’s The Effects of Increasing the Minimum Wage on Prices: Analyzing the Incidence of Policy Design and Context.
What impact does a higher minimum wage have on the economy?
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.
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.
What exactly is wage inflation?
Pay push inflation refers to an increase in the cost of products and services as a result of wage increases. Employers must raise the prices they charge for the goods and services they deliver to sustain corporate profits after pay increases. The overall increase in the cost of products and services has a cyclic effect on pay increases; as the total cost of goods and services rises, greater salaries will be required to compensate for rising consumer goods prices.
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.
Why is increasing the minimum wage a bad idea?
Because there are so many exceptions, the negative consequences of minimum wage legislation are currently reduced. The minimum salary for workers under the age of 20 is $4.25. The minimum salary for tipped employees is $2.13. Students can be paid up to 75% of the minimum wage. Agricultural employees are exempt. Seasonal laborers are excluded from the law. Exemptions apply to recreational establishments.
These exemptions assist firms in obtaining a consistent supply of low-cost labour. To put it another way, there are enough low-cost labor to fill the pool. These exclusions, however, do not aid low-wage individuals who have missed out on a solid first job before turning twenty. How can a 21-year-old from a low-income family catch up to their wealthier peers?
During their first year on the job, the majority of minimum-wage workers receive a raise. They’ve mastered the skills they’ll need to command a higher wage and are working their way up the corporate ladder. More jobs at or below minimum wage aid in filling the lower rungs of the ladder and allowing everyone to progress.
Setting the minimum wage at $15 per hour raises the starting point of the economic ladder 15 feet. Consider how unpleasant and irritating $15 per hour will feel if some teenagers are unemployed at $7.25 per hour.
Many entry-level positions forego some pay in exchange for educational opportunities and other perks. These perks are frequently more essential than the income. Forcing firms to pay a higher wage sometimes comes at the expense of the advantages that employees desire the most.
The alternative to a minimum wage job for an employer isn’t a higher earning job. Outsourcing or automation are two alternatives to a minimum wage employment. Both are achievable now, thanks to technological advancements.
Your McDonald’s drive-thru order may be routed to an Indian call center. Your order will be taken by an Indian employee who has excellent English abilities and has been trained to upsell the latest products. Meanwhile, a burger-cooking crew can be replaced by a $15-per-hour supervisor and a kitchen robot. The skill pool for even a job at the local McDonald’s can be the entire planet.
Outsourcing and automation can only replace minimum wage labor for a certain amount of money.
According to economists, every ten percent increase in the minimum wage results in the loss of 1% to 2% of entry-level jobs. Raising the minimum wage from $7.25 to $15 might result in an 11% to 21% decline in entry-level jobs. According to these predictions, between 1.8 and 3.5 million jobs will be destroyed. These positions will not be counted in unemployment figures. Before your attempts to obtain work are counted as being unemployed, you must have had a job.
According to the Congressional Budget Office (CBO), the proposed Raise the Salary Act of 2021 will remove 1.4 million jobs while affecting the 17 million workers whose hourly wage would otherwise be less than $15. Although their estimate ranged from zero to 2.7 million, this estimate puts the decline in entry level positions at 8.2 percent. They also mentioned, “Those decreases in employment would be disproportionately borne by young, less educated people.”
Estimates are hazy, at least in part due to the lack of a significant increase in the minimum wage. It will be too late by the time we attempt.
Several Democratic Senators have expressed reservations about the concept during the current discussion. They question if raising the minimum wage in the midst of a pandemic is a good idea. The premise is that because life is already difficult for everyone, a higher minimum wage will make things even more difficult. However, life is difficult for certain people, and a higher minimum wage makes it even more difficult for them. Laws that systematically, unnecessarily, and adversely affect people, even a small group of people, are harmful laws, regardless of their good intentions.
Making it illegal to hire these less qualified people for salaries below a predetermined threshold simply disadvantages them.
At the current minimum wage of $7.25 per hour, full-time employment would pay little over $15,000 per year. Around 18.6% of minimum wage workers come from families with annual incomes of less than $15,000.
Even if you just make $11,000 per year, you are still wealthier than 85 percent of the world’s population. We tend to forget these numbers, but we are all in good shape.
Ryan Young is a character in the film “For the Comparative Enterprise Institute’s “What Do Economists Think About the Minimum Wage?,” writes:
What if the minimum wage was 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 is the impact of the minimum wage on many workers?
Voluntary trades are the foundation of markets. Figure 10.6 “Labor Market with a Minimum Pay” shows that sellers (labor suppliers) want to sell 50,000 hours of labor to the market at the specified minimum wagethat is, 250 more persons want a 40-hour-a-week job when the wage rises from $4 to $5. Firms, on the other hand, want to buy only 32,000 hours of labor and hire 200 fewer people (8,000 fewer hours). No one can compel businesses to hire workers in a market where trade is voluntary. As a result, how much corporations want to buy, not how much workers want to sell, will decide the equilibrium quantity of labor transacted in the market.
We can now address the chapter’s first motivating question: what is the impact of adopting a minimum wage? When the government sets a minimum wage, two things happen:
- The number of workers hired in the market is decreasing. The number of unskilled workers employed falls from 1,000 to 800 in our scenario. As a result, while those who have jobs earn a greater income, some people have lost their work. The number of people employed has reduced.
- There are more people who wish to work than there are jobs available at the government-imposed salary. As a result, the minimum wage has resulted in joblessness. Because 1,250 people want employment at $5 an hour but only 800 are available, 450 people are unemployed; they want a job paying the prevailing wage but can’t find one.
Even though employment declined by only 200 workers, there are now 450 unemployed workers. The difference is due to the fact that a greater income encourages more people to work than before. In this scenario, a higher wage means 250 more people are interested in working.
In this explanation, we’ve assumed that everyone works 40 hours a week, in which case the number of persons employed must drop by 200. Another scenario is that everyone who wants a job can get one, but the amount of hours spent per person declines. Each worker would work 25.6 hours per week since there are 32,000 hours of work demanded and 1,250 persons looking for work. In this case, we refer to the position as underemployment rather than unemployed. Another scenario is that when the minimum wage is implemented, the number of persons employed remains the same (1,000), but those people are only allowed to work 32 hours per week. We have both underemployment (of the formerly employed) and unemployment in this scenario (of the extra workers who want a job at the higher wage). In real-life settings, both unemployment and underemployment are possible.
