Series 28 | Part 3: The Effect of a $15 Minimum Wage

There are two main theories against an increase in the minimum wage. The cost-push theory says that companies will have to raise prices to maintain the same profit margin because their wage and salaries expenses will rise. The demand-pull theory says that prices will go up because an increase in aggregate demand without an increase in aggregate supply causes a demand shock and bids up the price due to a sudden increase in demand outpacing production. Both of these theories posit that inflation largely negates an increase in the minimum wage.

The cost-push theory does not hold because most of our products are made by workers in other countries. Therefore, the prices of goods sold in the United States don’t rise unless wages rise in foreign countries. Additionally, wage increases in the United States decrease the price of goods produced overseas because of economies of scale. The demand-pull theory does not hold because most of the people who make minimum wage have accrued a lot of debt. They have credit card debt, student loans, car loans, mortgages, and medical bills. They will pay off their debt. If there is any money left over, they will probably save up for larger purchases, getting their own apartment, a down payment, or in case of unforeseen expenses in the future. Some people will buy more goods and services, which stimulates the economy and causes inflation that, in one study, was 0.4% for a 10% increase in the minimum wage. However, most of the new money will be used to pay off debt accrued from prior transactions.

Minimum wage increases tend to have a cascading effect that causes salaries to go up, as well. This should support both theories, but top earners don’t spend their money in the same way as middle-class and low-income workers. They invest in the stock market, their 401k, a certificate of deposit at a bank. They make capital investments. The top earners buy homes and cars in one lump sum. These are stores of value. They do not employ someone. These investments do not increase inflation for the majority of goods and services.

An increase in the minimum wage increases the participation rate because more people have an incentive to start looking for work. There are a number of people that cannot work because the cost of childcare while they’re at work is higher than their take-home pay. There are also additional transportation costs. If Trump raises the minimum wage, more people will start looking for work. This will create those childcare jobs. Due to the cascading effect, salaried employees will get a raise, which generates jobs when they do home repairs, hire a babysitter, take a vacation, and increase daily expenses. An increase in wages and salaries tends to increase productivity due to increases in motivation and a sense of accomplishment. Studies have shown the benefits to the economy far outweigh the increase in inflation.

Raising the minimum wage will also reduce government spending on housing, Medicaid, and food stamps and provide a net benefit to middle-class and low-income workers but only a small bump in liquidity, which keeps transactions just for necessary expenses like before. With more people working, tax revenue goes up. Sales tax may get a small bump from the middle-class and low-income workers. There will be a larger increase in sales tax when salaried employees use some of their raise to purchase durable goods like a laptop or new furniture.

Increasing the minimum wage will increase taxes and reduce government spending, which improves the budget. It will reduce personal debt. It will increase productivity. It will create some jobs. It will also cause a much higher velocity of money than a tax break, which means many people get to share in the benefits instead of just a few people storing the money in large homes. In our environment with unpaid personal debt, it is unlikely that inflation will rise much if at all. Only an increase in the minimum that has a far better than anticipated effect on the economy might cause an increase in inflation that could easily be stemmed by a small increase in the borrowing rate.

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