I was told in my High School Economics class that raising the minimum wage will lead to inflation, thus canceling out the effect of raising wages. Is this model correct? If so, is it possible to break out of this loop and truly raise the minimum wage.
Well, yes it could. See http://www.tutor2u.net/economics/content/topics/inflation/cost_push_inflation.htm
Also, she could have been mentioning the Phillips Curve. See http://www.j-bradford-delong.net/multimedia/PCurve1.html
The Phillips Curve is probably still covered in most high school econ. classes. I’d love to see what some of my college profs. who worshipped the Phillips curve would say about the late 90s economic boom with low unemployment and low inflation.
In real terms, the minimum wage is far lower than it would need to be merely to stay in pace with inflation. So it can hardly be a driver of inflation.
Try looking at it for what it is: The minimum wage is simply the outlawing of jobs below a certain wage level. If an employer cannot pay more than what is legal, then those jobs just disappear.
Note however, with todays global economy, there is no minumum wage in India or china. Only those jobs that cannot be outsourced are affected by the minimum wage laws these days, and they are becoming fewer and fewer(mostly in service jobs).
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- No, it is not, for two reasons. First is that (ideally) the wage that a job pays represents how valuable the job itself is. Minimum-wage jobs are the lowest-skilled, and usually the easiest to fill jobs around. When there are not enough people to do minimum-age jobs, the wages paid do rise–but this is usually an extermely local and fairly short-term event.
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- The second reason is that what something costs is ultimately tied to the cost of human labor needed to produce it. And that goes back to–>valuation of jobs.
… - It is difficult to “prove” anything anymore, the world being on a global economy and capital being a slippery thing and all–but at least one true observation can be made: whenever minimum wages are raised, that directly has the effect of pushing people into higher-tax brackets (in countries that use graduated taxation rates).
- Also note that “raising the minimum wage as means of bettering lower-income society” does not bear logical extension: if you drop the minimum wage completely, it would settle somewhere above zero, because people will not work for free. But if you raise it to $1000 an hour, the costs of labor would result in higher prices, only driving inflation. The lowest-paid workers would be no better off, and might well be worse off, if their country uses graduated taxation rates.
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- Well nuts–the above is the part I was saying was not possible to do. And the reason is because that the lowest-wage-paid is the basis for calculating valuation of all other higher wages.
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- Well nuts–the above is the part I was saying was not possible to do. And the reason is because that the lowest-wage-paid is the basis for calculating valuation of all other higher wages.
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That’s not really true. The minimum wage in real terms peaked in about '67 as you can see by this graph. I has been declining since then (more or less) and, according to the cite, has never been above the poverty level. It is, nevertheless, still higher than it was early on.
There is research out there arguing that the minimum wage actually helps. The simplest model—which is what you should have been learning, not the “facts”—is just a supply & demand graph which suggests that employment will go down. Raise minimum wage and people will lose their jobs. (The same can be said for unions, BTW.) Here is a page that discusses the impact of minimum wage on low-wage workers. There are also some interesting looking working papers on minimum wage here. Here are the “key findings” of the first link:
And the concluding paragraphs read:
I would be curious to see how investment responds to a raise in the minimum wage, if at all.
As far as inflation goes, firms can’t simply pass along the cost of minimum wage to buyers since the burden depends of the relative elasticities of the product’s supply & demand schedules. Then you have to consider how much the labor is reflected in the total price, how much of the economy depends on minimum wage labor, etc. Additionally, whether aggregate demand is raised by a higher minimum wage is not obvious, either, since that increase income comes from somewhere—most likely the spending & saving (i.e. investment) of someone else. The second link has at least one paper on that and it suggests, if I’m skimming it correctly, that prices to respond to the modest cost increase; but, the increase is not across the board and is reflected in a disproportionate rise in some prices and no change in others. You can do a better job reading that I can explaining.
That’s not what the linked graph is measuring. Since the US has not been in deflation (ever to my knowledge, but certainly not since 1938) then - by definition - any chart that uses today’s dollars as the current rate comparison would show the blue line above the red line, meeting at today. That says nothing whatsoever about the relationship between the line and the actual inflation rate.
Which is very easy to calculate. First find the minimum wage history of hikes at govInfo.
Then go to the Inflation Calculator on the Dept. of Labor site.
When you click on it you can enter a number from the past to see what the equivalent buying power is today.
When the box pops up, it defaults to 1980. The minimum wage was $3.10 in 1980. That would translate to a buying power of $7.05 today. The actual minimum wage is only $5.15. So it would need to be raised by $1.80 just to keep it even with inflation, if you used 1980 as the base. Using 1997 as the base, which is when the rate was raised to $5.15 gives $6.01 today.
Real dollars, by definition, account for inflation. The blue line is in real dollars, i.e. it shows the actual purchasing power of minimum wage over time. Today it is about where it was at in the '50s; i.e. minimum wage today has about as much purchasing power as it did in the '50s.
e.g. http://www.herc.research.med.va.gov/FAQ_A3.htm
Not exactly. What the chart shows is that every time the minimum wage fell to a point of equivalent buying power today it was raised. For a short period from the 50s through the 60s the raises were well ahead of inflation. I agree that the peak value came in 1968. Ever since then there has been a downward trend, allowing inflation to eat away at the value of the minimum wage. When it hit bottom in 1989, it was raised twice in the following two years. Historically speaking, it is clearly overdue for another raise since its buying power is at a 45-year low.
I am only arguing whether the minimum wage is a leading or lagging indicator of inflation. The upward slope of the line on your chart indicates leading, the downward slope indicates lagging.
I’m afraid you are in error. The blue line in the first graph is the U.S. minimum wage in 2002 dollars. Since the minimum wage in nominal dollars is given in the red line, you can use that to make inferences about the general price level, which you are free to do; however, that doesn’t change the fact that real dollars qua real dollars show the purchasing power with inflationary effects taken out. To argue otherwise will require assigning a new definition to real dollars.
Hit submit too soon.
If you look at the years from 1940 to 1965 you can see the nominal minimum wage rise in step fashion; but in real terms it jumps with the increase and then steadily decrease with inflation. If it caused inflation, then you’d expect to see the post-rise decline to flatten out after the adjustment. It doesn’t do that.
This is an odd argument since I agree with you. But why even reference the chart if it is not to be used for clarifications of what dollar figures meant in the past?
To use an analogy, it is a simple matter to show that in real terms gasoline prices have been much higher in the past than today. Yet there is no question that they are currently rising faster than inflation.
In the same way, the minimum wage has been much higher in real terms in the past than today. Yet there is no question that it is not currently rising, and over the past several decades it did not rise faster than inflation.
My answer to the OP’s question is that raising the minimum wage does not lead to inflation. Do you disagree?
No. I guess I’m misreading you all around. Sorry about that.
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No problem. In the same way it took me several looks to realize that your chart was displaying the same data in a different kind of format. And I didn’t see that second post of yours when I posted.
Now if gregongie would only come back to tell us if any of this helped…