How Does Raising the Minimum Wage Increase Inflation?

Susan Kelly

Jun 02, 2022

Many fast-food employees began agitating for $15 an hour as a federal minimum wage in the early 2010s. If they are granted their request and the minimum wage for federal workers increases to $15 per hour, a minimum wage worker will earn about $30,000. There are a variety of opinions about whether raising the minimum wage will increase Inflation. The question posed is: Does Raising the Minimum Wage Increase Inflation?

High unemployment has generally coincided with a rise in Inflation in the past. The possibility is that increasing the minimum wage will aid in stimulating the economy due to the greater spending capacity of workers who are earning higher salaries. Also, it is possible an excessive amount of a mandated minimum wage by the government could harm employment rates.

In the past, increases in minimum wages were huge, one-time changes that were implemented with no notice to companies. However, recent state and city-wide minimum wage increases are scheduled to be carried out over time and usually are tied to a certain amount of Inflation. These smaller, planned minimum wage increases seem to have a more negligible effect on prices than significant one-time increases. While state and federal minimum wage increases are believed to have similar products, more research is needed to understand the full impact of increases in city minimum wages.

The Argument That the Minimum Wages Increase Inflation

The idea of raising the minimum wage has numerous people against it. The first is that economists believe that an excessively high minimum government-mandated salary can create an artificial floor for the market for labor, which could cause inefficiencies and distortions. They argue that in need of free work, one could be willing to do it at a $10 an hour wage. However, because the government has mandated an hourly wage of at least $15, the worker cannot bid less for the position.

Another theory is that companies forced to pay higher wages may eventually hire fewer workers. This could cause higher unemployment as the workers who might have been willing to accept lower pay aren't engaged in Inflation, the so-called wage inflation caused by an overall increase in wages. Based on this theory, in order to sustain the profits of corporations after the rise in wages, the prices that employers charge for the products and services that they provide need to be increased.

The general increase in the cost of goods and services impacts wage rise. Eventually, as the cost of items and services in the market expands in value, higher wage levels will be required to offset the rising costs of consumer goods. According to an economic analyst Ed Rensi, previously an executive at McDonald's, a greater minimum wage could eliminate some current jobs. It could lead to the closure of many small-scale firms.

Argument That a Higher Minimum Wage Cannot Increase Inflation

Although arguments for wage-push Inflation are valid, the evidence backing these claims isn't always reliable. In the past few years, wage increases for minimum wage have only had a negligible impact on the pressures of Inflation on prices in an economy.

For instance, in 2016, research conducted by the W.E. Upjohn Institution for Employment Research discovered that when using the monthly prices, the passing-through effect is wholly focused on the month in which the minimum wage increase goes into effect. It is significantly less than what the canonical literature has discovered.

Their study looked into the effects of price increases on minimum wage increases in different states across the U.S. from 1978 to 2015. It was designed to investigate the extent of the pass-through effect as well as enhance the discussion on the ways that different policies can affect the impact the minimum wage increase has on the price of goods and services.

Their primary conclusion was that the elasticities of wage prices are considerably lower than what was previously observed in earlier studies. We see prices rise by 0.36 percent for each 10 percent growth in the minimum wage. Furthermore, the price increases after minimum wage hikes typically are observed within the month when the minimum wage hike is put into effect, not the months prior or following.


Are increasing the minimum wage an excellent economic idea? It is contingent on the sources you seek. Some claim that increasing the minimum wage up to an overly high amount would create an inflationary burden upon the market; research has shown that raising it to meet the pace of Inflation will only impact a small degree.

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