Inflation and the Minimum Wage

This article here states that a new minimum wage has been set and will increase to $7.25/hour by 2009. These articles here and here discuss how, contrary to some opinions, inflation is not affected by minimum wage increases. So how what is the relationship between the two?

"In the past decade, inflation has depleted the value of the minimum wage to the lowest level in more than 50 years," according to the first article. It seems that minimum wage increases are actually symptoms of inflation, not the other way around.

The other two articles discuss how inflation is affected by monetary policy enacted by the FED, and that the real pain of minimum wage increases are the workers that are the least employable. If an employee was barely worth the previous minimum wage, they do not 'magically' produce all of a sudden in a manner worthy to be compensated at the new wage level. Many of that group will loose their jobs if their employer cannot afford to pay the new wage.

Hence, the law that was passed to 'help the poor and less fortunate' may actually be hurting them, especially since the indicated inflation is already devaluing the few dollars they had before they were unemployed.


Dominic said...

After talking about price floors and price ceilings, I don't understand why we need a minimum wage. What would happen if we didn't have one? If your employer did not have to pay your current wage, would they pay you less? I am guessing that most of us reading this blog don't make minimum wage and would not be adversely affected. However, would the price at McDonalds come down? Next, let me ask, would the price at McDonalds come down because those employees were not worth the previous minimum wage? In my mind, the invisible hand should guide the market, not regulations set by the government. When looking at the long-run, is there something that I am missing?

Dr. Tufte said...

Essentially, Logan is correct about inflation. This is primarily a monetary phenomenon. Minimum wage changes are not common, nor do they affect enough workers (about 3%) to make much difference.

As to the minimum wage, Logan's analysis is also OK.

I would add, that another way of looking at it is that the government is indirectly requiring bosses to work minimum wage earners harder. That doesn't sound pretty.

Dominic: I don't think you're missing anything.

Having said that, I think this is another one of those situations where the mini-lecture from October 10th is worth remembering. From the perspective of folk beliefs about economics, ordering one group (owners) to pay another group (workers) more is pretty sensible if you think the economic pie has a fixed size, and that the rich get that way by stealing some of it.