Inflation:
A continual increase in the price of goods and services.
Cited: http://www.merriam-webster.com/dictionary/inflation
The Topic, A Hard Question to Crack
There’s been a lot of speculation around the question: “Would increasing minimum wage cause inflation and a reduction in hours for employees?” The truth is hard to come across in the recesses of the internet where lies can be seen at every corner, but all it takes is a simple source check and some common sense to root out the propaganda.
The Minimum Wage Accusation
This accusation has to do with people under the assumption that minimum wage earners are lazy and are not motivated enough to go out and make millions. Well, sadly, the numbers are against you the moment you are born when it comes to making millions. Now, when it comes to making a decent living that is more in the grasp for everyone, however, as you can see in the video on the right the middle class is suffering just as much as the lower classes.
This is not as black and white as some people like to make it out to be. There are a lot of circumstances that determine where someone will end up. Not everyone has the same opportunities so you can not compare one person to the other.
To expound a bit: The world is divided into social classes and has always been since people started placing value on specific enmities. The USA has always had a capitalistic view of the economic market which has, for the most part, put it on top of the world in terms of monetary value. So it is not without reason that majority of people have the work hard mentality to gain social status which is not a bad thing. It causes a well placed work market and keeps demand for labor strong. In a complete socialist economy the wealth is distributed evenly, therefore, people are less likely to be motivated to work since everyone is making the same wages. So as far as a capitalistic view is concerned in the work place, it is very beneficial, however, when the wealth distribution becomes so spread out between the working and middle class to the top one percent an issue arises. History has a way of repeating itself and this great divide in wealth in the US has been seen before in many revolutions. For an example, the French Revolution.
https://www.mtholyoke.edu/courses/rschwart/hist151s03/french_rev_causes_consequences.htm
A lot of these points from the French Revolution can be seen in today’s society in the US. A growing disparity in the social classes, anger towards the top one percent, and inabilities of the government to act and fix the problems (they just seem to be band aiding all the issues with no correct fix). So as far as a society goes we are not completely safe against economic issues bringing in something more severe.
First, An Economics Lesson
Inflation is a tough concept to grasp. Not in the literal form of the word, but when applied to theory in an economic society. It’s a proven fact that as communities grow, so does the monetary value of items. That is due to the fact that humans require specific items for survival. These items are generally summed up as “needs”. Examples of needs in a 21st century modern society:
Housing
Food
Electricity
Water
Those are the bare necessities for living a life within the 21st century. People are guaranteed certain rights by the Bill of Rights and life is the one in particular I will focus on. Life, categorized by the 21st century standard, involves all the needs above. You need a house to protect your property and your family, you need food and water to sustain your everyday functions, and you need electricity to cook and keep warm.
Needs play into the supply and demand curve of economics. If a person can only spend money on what they need, demand for things not necessary go down, while those who can pay for those needs and have money left over can buy unnecessary things which cause their demand to go up. The entirety of economic prosperity is dependent on the movement and demand for goods.
My Conjecture on the Inflation Question
I am not an economist. I have taken a class or two in college on economics, but that is about it. I am going to relay my opinion on some economic theory that I have concluded when it comes to this issue based off of the information above with supply and demand. After this section I will add Economists opinions that either agree with or disagree with this opinion.
Supply and demand are interrelated. One thing that affects supply will also affect demand and vice versa. Demand is affected by peoples ability to buy products and supply is affected by the demand for those products. A company would not continue to make this number of product if the demand curve showed a large decrease for that product. Just like a company would increase production (Supply) on a product if the demand curve showed an increase in sales (Demand) for that product.
http://www.investopedia.com/terms/s/supply.asp
Supply: Total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.
http://www.investopedia.com/terms/d/demand.asp
Demand: Describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.
As stated above supply and demand is all about the movement of goods from production, to retailer and finally to consumer. It is all about the consumer.
So let us get into inflation. There are different types of inflation:
Demand Pull Inflation: Demand increases faster then supply.
Cost Push Inflation: Increase in price of raw materials increase price of finished good.
Wage Push Inflation: Increase in wages causes increase in prices of goods.
Imported Inflation: Decrease in exchange rate making imports more expensive.
Core Inflation: Inflation caused without volatile factors.
The link above explains these types of inflation in detail. And this link here:
http://www.marketplace.org/topics/economy/whiteboard/why-inflation-can-be-good-thing
Explains a little bit on how inflation is good for an economy.
So as we can see inflation happens a number of ways and the theory behind cost push inflation would suggest that the prices of goods would inflate from a minimum wage increase. But lets take a look at the why:
Minimum wage earners are now earning $10.10 an hour so they are making more per paycheck. They are able to pay off the expenses in the need category and pursue products that are not a necessity. This will increase demand for those products, therefore, the price will inflate. The offsetting of higher wages by the employer will also increase prices, but not by too much (Stay tuned for this lower in the article). That means consumer spending is a big cause for this inflation, which is good inflation, and rises at a slow rate.
An example of bad inflation would be if the market became stale. There’s such a division of wealth between the lower and middle class to the upper class that spending becomes stagnant due to increasing inflation with no change to wages earned, therefore, there is almost no demand in the market which causes supply to lower. This lowering in supply causes an exponential increase in the price of the good due to lack of supply and no demand. Think of a shortage, it rises the prices, except the shortage is due to the lack of demand. An exponential increase in inflation is bad inflation because it generally turns explosive. For example: Germany and its Weimar currency.
https://www.facinghistory.org/weimar-republic-fragility-democracy/economics/inflated-weimar-currency-1923-economics-1919-1924-inflation
This example is an extreme case and came about from differing reasons then what is explained above.
Here’s a more involved explanation:
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=demand+and+supply+decrease
What About Minimum Wage and the Effects on the Employee?
Now to get into the minimum wage issue. Should it be increased? I would say yes because minimum wage rates are not in line with inflation. Inflation erodes minimum wage value and has never been reset to accommodate for that erosion.
To give an example, the minimum wage set in the 1960’s was the peak for minimum wage earners at about $10.50 an hour in today’s dollar. That means in 1960 you were making more an hour for a minimum wage job than you are today. Indexing the minimum wage to inflation would be ideal because it can inflate with prices and minimum wage earners can retain their ability to spend in the market.
Now people have commented in discussions in my various classes, and on the internet, how raising the minimum wage will cause problems with products prices rising too much. I showed how, in theory, prices would rise, but they would not rise exponentially because demand will increase. Also, they are worried that employers will cut hours as well as fire their employees and I will say that will probably be dependent on employer. If you work for Walmart then you probably have nothing to worry about. They make millions of sales a year, if they increase everything in their stock by $.10 they make enough to offset the additional wages earned by employees. As a part time employee you are at risk of having your hours cut, but you were always at that risk. Remember, you are a part time employee. Full time will always guarantee you full time. I will not say that it will be an easy transition for businesses, but I will say once everything smooths over they will benefit.
The Demand Issue
Another negative effect could be a turn in demand. Not when it comes to spending in the market, but labor demand. Once the price for labor increases, it is possible for demand for that labor to decrease which will cause less jobs to be created in that situation. Less jobs means more people living in poverty.
The Negative Effects
Some of the negative effects could be seen when future planning comes in to place. As technology increases so does the involvement of computerized systems performing tasks that would have had a minimum wage employee filling that position. History shows that as true. A lot of minimum wage jobs that were around in the 1960’s do not exist today.
Also, a alot of the positive data collected by the government and other agencies are not accounting for some variables. For example, there’s a lot of analysis that backs up the increase stating it will cost the Federal Government nothing and help out the low wage worker, except it does not account for time. What happens after the increase? The amount of jobs lost? The statistics are based off of estimates and not original research.
However, when it comes to increasing the minimum wage in increments to meet a certain criteria by a certain year can actually ease the transition and offset any economic disturbance.
Economics Books of Interest:”Capitalism and Freedom” by Milton Friedman.
“The Affluent Society” by J.K Galbraith.
“The General Theory of Employment, Interest and Money” by Keynes.
“The Wealth of Nations” by Adam Smith.
“Making Globalization Work” by Joseph Stiglitz.
“Peddling Prosperity” by Paul Krugman.
“Development as Freedom” by Amartya Sen
Note: The links above will take you to a website to get a PDF online version of these books!
To Conclude
Overall, the negative effects just do not add up. A minimum wage increase helps low wage earners at no cost to the federal government, inflation would not be affected in any substantial way, and a slow and steady increase of minimum wage would help businesses ease into the transition.
Sources Cited”Wealth Distribution in the USA – SHOCKING!” YouTube. YouTube, 05 Mar. 2013. Web. 21 Apr. 2014.
“The Impact of a Minimum-Wage Increase.” Economix The Impact of a MinimumWage Increase Comments. N.p., n.d. Web. 21 Apr. 2014.
“Economist’s View.” : The Minimum Wage and Employment When Employers Have Market Power. N.p., n.d. Web. 21 Apr. 2014.
“Causes of the French Revolution.” Causes of the French Revolution. N.p., n.d. Web. 19 Apr. 2014.
“Why Inflation Can Be a Good Thing.” Marketplace.org. N.p., n.d. Web. 21 Apr. 2014.
“Different Types of Inflation.” Economics Help. N.p., n.d. Web. 21 Apr. 2014.
“Inflated Weimar Currency (1923) (Economics – 1919-1924: Inflation).” Facing History. N.p., n.d. Web. 21 Apr. 2014.
“AmosWEB Is Economics: Encyclonomic WEB*pedia.” AmosWEB Is Economics: Encyclonomic WEB*pedia. N.p., n.d. Web. 21 Apr. 2014.
“Graph: How Inflation Erodes the Minimum Wage (And Why It ’s Time to Raise It, Permanently) : Blog of the Century : The Century Foundation.” Graph: How Inflation Erodes the Minimum Wage (And Why It ’s Time to Raise It, Permanently) : Blog of the Century. N.p., n.d. Web. 21 Apr. 2014.
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