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Will Minimum Wage Lead to Inflation

In: Business and Management

Submitted By jothamkwok
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It is not always easy to obtain objective information when it comes to a politically charged issue such as raising the federal minimum wage. Proponents and critics alike tend to bolster their positions by publishing the opinions of economists who share their political bent. Does raising it have a measurable effect on the rest of the economy, including the issue of inflation? Yes. Can a rise in the inflation rate be attributed directly to a rise in the minimum wage? Not necessarily. Both sides of the debate do present persuasive arguments, but these arguments may be based on skewed or purely theoretical assumptions. There is a relationship between setting the new minimum wage and inflation, but it's more of a cart before the horse situation. Many proponents of a raised federal minimum wage support the idea of matching the new base wage to the current rate of inflation, a process known as indexing. By doing this, proponents believe the wage-earner's real spending power will also be increased. When a wage hike does not keep up with inflation, which has been the case in recent years, the workers' paychecks may get a little larger but inflated prices of goods and services actually reduce the spending power of that raise. So we know that inflation can have a detrimental effect on the real spending power, but does a raised minimum wage cause inflation? Yes and no. From an economic standpoint, inflation can be caused by any number of new or increased costs of production, including an increase in workers' wages. If a company must increase the amount it pays its workers by several dollars, there is obviously a new expense that must either be absorbed by the company as the cost of using human labor or passed on to customers in the form of higher prices. Economists call this phenomenon cost-push inflation. An increase in the federal minimum wage did create…...

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