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Would Increasing Minimum Wage Cause Inflation?

News & Politics, Political-Opinion
Alex Robles joins dozens of sign-holding protesters at a rally against low wages for fast-food workers, in front of a McDonald's Thursday, Dec. 5, 2013, in Phoenix. (AP Photo/Ross D. Franklin)

Alex Robles joins dozens of sign-holding protesters at a rally against low wages for fast-food workers, in front of a McDonald’s Thursday, Dec. 5, 2013, in Phoenix. (AP Photo/Ross D. Franklin)

President Obama on Minimum Wage:

The Minimum Wage Accusation

This accusation has to do with people under the assumption that minimum wage earners are lazy and are not motivated enough to go out and make millions. Well, sadly, the numbers are against you the moment you are born. Now, when it comes to making a decent living that is more in the grasp for everyone, however, as you can see in the video on the right the middle class has suffered in recent years.

This is not as black and white as some people like to make it out to be. There are a lot of circumstances that determine where someone will end up. Not everyone has the same opportunities so you can not compare one person to the other.

To expound a bit: The world is divided into social classes and has been that way since people started to value specific enmities. The USA has had a capitalistic view of the economic market which has, for the most part, put it on top of the world in terms of monetary value. So it is not without reason that majority of people have the work hard mentality to gain social status which is not a bad thing. It causes a well placed work market and keeps demand for labor strong. In a complete socialist economy the wealth is distributed evenly, therefore, people are less likely to be motivated to work since everyone is making the same wages. So as far as a capitalistic view is concerned in the work place, it is very beneficial, however, when the wealth distribution becomes so spread out between the poor and middle class to the top one percent, an issue arises. History has a way of repeating itself and this great divide in wealth in the US has been seen before – the French Revolution.

A lot of these points from the French Revolution can be seen in today’s society in the US. A growing disparity in the social classes, anger towards the top one percent, and inabilities of the government to act and fix the problems (they just seem to be band aiding all the issues with no correct fix). So as far as a society goes we are not completely safe against economic issues.

What is Economics and Inflation

Inflation is a tough concept to grasp. Not in the literal form of the word, but when applied to theory in an economic society. It’s a proven fact that as communities grow, so does the monetary value of items. That is due to the fact that humans require specific items for survival. These items are generally summed up as “needs” and obtain value by their usefulness. Examples of needs in a 21st century modern society:

  • Housing
  • Food
  • Electricity
  • Water

Those are the bare necessities for living a life within the 21st century. People are guaranteed certain rights by the Bill of Rights, and, since life is a right, then the bare necessities of that right should be most easily attained. Life, categorized by the 21st century standard, involves all the needs above. You need a house to protect your property and your family, you need food and water to sustain your everyday functions, and you need electricity to cook and keep warm.

Needs play into the supply and demand curve of economics. If a person can only spend money on what they need then demand for things not necessary go down. Those who can pay for those needs and have money left over can buy unnecessary things which cause their demand to go up. The entirety of economic prosperity is dependent on the movement and demand for goods.

Distribution of Wealth in the USA:

http://youtu.be/rMhvYeQPOcE

What is Supply, Demand, and the Different Types of Inflation

Supply and demand are interrelated. One thing that affects supply will also affect demand and vice versa. Demand is affected by peoples ability to buy products and supply is affected by the demand for those products. A company would not continue to make this number of product if the demand curve showed a large decrease for that product. Just like a company would increase production (Supply) on a product if the demand curve showed an increase in sales (Demand) for that product.

  • Supply: Total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.
  • Demand: Describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.

As stated above supply and demand is all about the movement of goods from production, to retailer and finally to consumer. It is all about the consumer.

There are different types of inflation:

  • Demand Pull Inflation: Demand increases faster then supply.
  • Cost Push Inflation: Increase in price of raw materials increase price of finished good.
  • Wage Push Inflation: Increase in wages causes increase in prices of goods.
  • Imported Inflation: Decrease in exchange rate making imports more expensive.
  • Core Inflation: Inflation caused without volatile factors.

Inflation can be a good thing because it can erode debt and push for better wage growth overall.

So as we can see inflation happens a number of ways and the theory behind cost push inflation would suggest that the prices of goods would inflate from a minimum wage increase, but is it good inflation… Or bad inflation?

Minimum wage earners are now earning $10.10 an hour so they are making more per paycheck. They are able to pay off the expenses in the need category and pursue products that are not a necessity. This will increase demand for those products, therefore, the price will inflate. The offsetting of higher wages by the employer will also increase prices, but not by too much (Stay tuned for this lower in the article). That means consumer spending is a big cause for this inflation, which is good inflation, and rises at a slow rate.

An example of bad inflation would be if the market became stale. There’s such a division of wealth between the lower and middle class to the upper class that spending becomes stagnant due to increasing inflation with no change to wages earned, therefore, there is almost no demand in the market which causes supply to lower. This lowering in supply causes an exponential increase in the price of the good due to lack of supply and no demand. Think of a shortage, it rises the prices, except the shortage is due to the lack of demand. An exponential increase in inflation is bad inflation because it generally turns explosive. For example: Germany and its Weimar currency. (This example is an extreme case and came about from differing reasons then what is explained above).

Germany's Weimar Currency Inflation. It was said that people would bring wheel barrels full of currency to buy a loaf of bread. www.dialoginternational.com

Germany’s Weimar Currency Inflation. It was said that people would bring wheel barrels full of currency to buy a loaf of bread. www.dialoginternational.com

What About Minimum Wage and the Employees?

Now to get into the minimum wage issue. Should it be increased? It is a possible answer to the issues that have arisen over the problems shown in wealth disparity.

To give an example, the minimum wage set in the 1960’s was the peak for minimum wage earners at about $10.50 an hour in today’s dollar. That means in 1960 a person was making more an hour for a minimum wage job than they are today. Indexing the minimum wage to inflation would be ideal because it can inflate with prices, and minimum wage earners can retain their ability to spend in the market.

Now people have commented in discussions in various contexts, and on the internet, how raising the minimum wage will cause problems with products prices rising too much. In theory, prices would rise, but they would not rise exponentially because demand will increase. Also, they are worried that employers will cut hours as well as fire their employees and that will probably be dependent on employer. If someone works for Walmart then they will probably have nothing to worry about. They make millions of sales a year, if they increase everything in their stock by $.10 they make enough to offset the additional wages earned by employees. Part time employees might be at risk for losing hours, but they always had that risk.

This is a graph from shows the growth rate of minimum wage which has decreased by 25% since 1968. Inflation causes erosion of minimum wage value.

This is a graph from shows the growth rate of minimum wage which has decreased by 25% since 1968. Inflation causes erosion of minimum wage value.

The Negative Effects Due To a Bump in Minimum Wage

Some of the negative effects could be seen when future implementation. As technology increases so does the involvement of computerized systems that perform tasks that would have had a minimum wage employee in that position. History shows that as true. A lot of minimum wage jobs that were around in the 1960’s do not exist today. Also, the positive data collected by the government and other agencies do not account for some variables. For example, there is analysis that backs up the increase stating it will cost the Federal Government nothing and help out the low wage worker, except it does not account for time. What happens after the increase? The amount of jobs lost? The statistics are based off of estimates and not original research. However, when it comes to increasing the minimum wage in increments to meet a certain criteria by a certain year, it can actually ease the transition and offset any economic disturbance.

February of 2014 the Congressional Budget Office (CBO) came out with a new plan based on the specific analysis of two plans. These two plans are based on incremental stages. This is a given because a drastic rise in anything within the economy can have an adverse effect on multiple areas of the economy. The two options called for are a $10.10 option and a $9.00 option. Basically it is an annual increase of about $.95 a year. A pretty decent raise. Per the CBO depending on the option taken it would take between 500,000 and 1,000,000 people out of the poverty threshold. That is an impressive number, but it fails to compare when one looks at the amount of people in that thresh hold. That number is estimated at a whopping 45,000,000 people. At maximum that is only a 2.2% increase in people out of the poverty level and that is before it accounts for jobs lost. Jobs lost is estimated between 100,000-500,000.The CBO, after calculating all of this, estimates that only 300,000-900,000 people will be brought above poverty level. Is it really worth that 1-2%?

Increasing minimum wage will also have an adverse affect on government spending for hourly employees and goods that are guaranteed to rise in price. Generally those prices would be handled by discretionary appropriations, however, they are capped till 2021. So increasing the minimum wage poses iffy questions. However, the economy is not something that can be locked down to exact science. The core foundations of modern economics are based off of rationalized ideals and not statistical tests. The only way to figure out this dilemma is to put a force into action and see what data emerges.

Jared Bernstein, a senior member for the Center on Budget and Policy Priorities in Washington and a former chief economist states his opinion on another route to take involving the job market:

  • “As I’ve stressed many times on this blog, policy makers need to be concerned about the quantity of jobs, and pursue policies that will increase that number. But they also have to worry about job quality, especially in the low-wage sector, where the decline in the real value of the minimum wage, the increase in earnings inequality (meaning less growth finds its way to the low end of the wage scale), and the low bargaining power of the work force have placed strong, negative pressure on wage trends for decades.”

Another negative effect could be a turn in demand. Not when it comes to spending in the market, but labor demand. Once the price for labor increases, it is possible for demand for that labor to decrease which will cause less jobs to be created in that situation. Less jobs means more people living in poverty.

To Conclude

The economy is something that changes drastically from time to time. It is a big force in many peoples lives. Making sure the economy runs smooth should be an aspect of everyone’s life because it affects them so. In theory, a minimum wage increase can benefit a lot of people. Analytically, it looks like it will only benefit, at best, 2.2.% of those in poverty. This is a moment where a decision needs to be made with some objectivity to it. An empirically rationalized answer needs to be sought. There is more than one answer. The minimum wage can be raised. Tax exemptions for the super wealthy can be lowered. Taxes for those below the poverty line can be lowered. There is the Libertarian candidate, Lucas Overby, who would see all tax exemptions erased and a set percentage would be given to each social class. He spoke of a scale by fives: 5% for the lower class, 10% for the middle class, 15% for the upper class. Since there are no exemptions the upper class pays more in taxes while giving the lower class a much needed boost in their overall income that they get to keep. So there are options. The government just needs to figure out the way to implement it without creating havoc.

Sources Cited

  1. “Wealth Distribution in the USA – SHOCKING!” YouTube. YouTube, 05 Mar. 2013. Web. 21 Apr. 2014.
  2. “The Impact of a Minimum-Wage Increase.” Economix The Impact of a MinimumWage Increase Comments. N.p., n.d. Web. 21 Apr. 2014.
  3. “Economist’s View.” : The Minimum Wage and Employment When Employers Have Market Power. N.p., n.d. Web. 21 Apr. 2014.
  4. “Causes of the French Revolution.” Causes of the French Revolution. N.p., n.d. Web. 19 Apr. 2014.
  5. “Why Inflation Can Be a Good Thing.” Marketplace.org. N.p., n.d. Web. 21 Apr. 2014.
  6. “Different Types of Inflation.” Economics Help. N.p., n.d. Web. 21 Apr. 2014.
  7. “Inflated Weimar Currency (1923) (Economics – 1919-1924: Inflation).” Facing History. N.p., n.d. Web. 21 Apr. 2014.
  8. “AmosWEB Is Economics: Encyclonomic WEB*pedia.” AmosWEB Is Economics: Encyclonomic WEB*pedia. N.p., n.d. Web. 21 Apr. 2014.
  9. “Graph: How Inflation Erodes the Minimum Wage (And Why It’s Time to Raise It, Permanently) : Blog of the Century : The Century Foundation.” Graph: How Inflation Erodes the Minimum Wage (And Why It’s Time to Raise It, Permanently) : Blog of the Century. N.p., n.d. Web. 21 Apr. 2014.
  10. Office, Congressional Budget. (n.d.): 1-10. The Effects of a Minimum-Wage Increase on Employment and Family Income. CBO, Feb. 2014. Web. 8 Aug. 2014.
    <http://www.cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf>.
  11. Bernstein, Jared. “The Impact of a Minimum-Wage Increase.” Economix The Impact of a MinimumWage Increase Comments. N.p., 18 Feb. 2014. Web. 12 Aug. 2014. <http://economix.blogs.nytimes.com/2014/02/18/the-impact-of-a-minimum-wage-increase/>.

Originally published October 8, 2015.

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