Expensive tool: Minimum Wage to Meet the Targeted U.S. Inflation

On April 8th, WSJ posted a nice article, As Wage Debate Rages, Some Have Made the Shift, about recent debate about minimum wage debates.  According to the Merriam-Webster’s online dictionary, minimum wage is defined as following:

An amount of money that is the least amount of money per hour that workers must be paid according to the law

And the law says “the federal minimum wage provisions are contained in the Fair Labor Standards Acts (FLSA). The federal minimum wage is $ 7.25 per hour effective July 24, 2009. Many states also have minimum wage laws. Some state laws provide greater employee protections; employers must comply with both”

I assume that most of people who read this blog post are aware of the common argument in support of the minimum as well as the other side of arguments. However, I would like to reiterate one main point from each sides of argument. For the supporter’s side, they want to make sure the people who sit at the lower level of socio-economic standing to have some purchasing power to live healthier life. On the other hand, the other side argues that minimum wage law hurts those same people, because the market adjusts to the increases fairly quickly and it returns back to us as the increase in the real price tags. Today, I am not trying to pick a side but to mention the fact that it is expensive tool, (not recommended), which Fed can use when it needs of meeting their inflation target. In U.S., inflation has been hovered bellowed 2% mark. Fed wants to meet their goal of 2% inflation target while holding Federal fund rates close to zero. Because, this way, Fed can achieve their goal of stimulating economy more effectively than 1% inflation rate considering the Zero Lower Bound problem. However, I do not recommend that use minimum wage increase to meet their goal. I am not saying Fed wants to do so, yet you never know why things are happening in real life. Thus first, here are some of examples from the article, why raise in minimum wage pushes up the inflation rate.

Here is some of testimony which WSJ interviewed:

“Our business is a penny business,” he said. Overcoming higher labor costs “ultimately comes down to pricing.”Last year he raised prices 5% across all his restaurants, which span Fresno to the Bay Area, and said consumers haven’t flinched. Due to those price increases, he said, profits haven’t been hit by San Francisco’s escalating minimum wage.

Another saying that

Patrick Renna, CEO of boloco, a 22-unit burrito chain based in Boston, pays starting workers $9 an hour. State lawmakers are considering raising the minimum wage to as much as $11 an hour from $8 an hour. To offset labor costs, he has raised prices three times since 2010.

I presented cases in which price level gets increased to point out the cost of products often adjust to upward in order to offset the increase in wage cost. In addition, it seems from the article that rises in minimum wage made many workers happier, because of increase in wage. Trade off to gain higher inflation rate and save thousands of people out of poverty seems bit expensive to me, Congressional Budget Office estimated that raising the minimum wage to $10.10 an hour would reduce U.S. employment by 500,000 but lift 900,000 Americans out of poverty” Now we can hope that government use this force of inflation push wisely and create better jobs for 500,000 people whom lost their job due to the minimum wage increase.

3 thoughts on “Expensive tool: Minimum Wage to Meet the Targeted U.S. Inflation

  1. Chris Chegash

    I agree that using minimum wage to increase inflation is not a good idea. The government wants to raise inflation slightly and decrease unemployment simultaneously. Creating a higher minimum wage will raise inflation, but will at best keep unemployment constant (if all firms increase prices to offset wage increases).

  2. sekoch

    The price increases you mentioned seem to have gone smoothly, but I think the fundamental problem is a systematic issue between urban and rural areas. If a local Michigan diner raised prices by 10%, I believe there would be more backlash than for a restaurant in New York City or San Francisco. Similarly, people in NYC realistically need to make much higher than $7.25/hr to live a life out of poverty. In rural areas, it may be entirely possible to live comfortably at that level. For those reasons, I think a much better solution would be to consider these different lifestyles rather than trying to come up with an impossible “one-size-fits-all” solution.

  3. enjar

    I don’t agree that minimum wage increase will raise inflation. It will just increase the price level for one time, not inflation. To have higher inflation, the general price increase will have to be greater for long period of time. But in this, case we will have just price level increase in one or two period. That is not a solution for a low level of inflation problem we are having right now

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