The Case for Raising Minimum Wage

"If you raise minimum wage, prices go up" or "If you raise minimum wage, you get inflation." Empirically speaking, this inflation cycle being suggested has already been shown not to happen. The result of raising minimum wage is, firstly, not directly inflation, and, secondly, decreased unemployment, which more than offsets any indirect inflation.

Speaking of direct consequences, very rarely do companies drastically raise prices to accommodate minimum wage increases. Most companies can accommodate a $0.12 raise in minimum wage by increasing their prices $0.01. If that increase is $2.40, then the price increase is, roughly, $0.20. And, as we'll get to in a second, the impact of that $2.40 offsets the $0.20.

But first, since we are speaking empirically, it must be pointed out that a lot of companies choose to eat some or all of this cost out of their profit margin instead of raising prices. The reason for this is that if one competitor decides not to increase prices, the remainder cannot increase theirs without losing consumers. And this is especially the case if the target consumers are not minimum-wage earners, whose wages, consequently, did not increase: the fact that minimum wage has increased does not affect non-minimum-wage earners decision to seek the best bang for their buck. In sum, the increase in income is noticeable for minimum-wage earners, but the costs are rather unnoticeable to middle-income earners.

Now back to that $2.40 or, more precisely, what exactly does happen to the inflation cycle following minimum wage increases such that the costs are offset. The cycle works as follows:

• Minimum wage is increased.
• Minimum-wage earners spend more.
• Demand increases for various products.
• Employment increases via new and/or expanded business operations to cover producing for this demand.
• This new employment puts more disposable income into middle-income families.
• More disposable income means even more demand. (Go back to #4 above).
• Eventually, this demand increase starts to level off. Along the way, certain industries reach a point where this levelling-off of the demand makes the barrier for entry into the industry too high for new competitors to get in, yet still does not cover all the new demand from the new disposable income.
• At this point, companies optimize their pricing to match the supply deficit, which is to say they increase prices because they can without losing adequate demand for their supply.

That's when real inflation has historically actually occured--after a bunch of new jobs have opened up and a bunch of disposable income has entered the consumer market and companies, consequently, price optimize for supply deficits. Significant and noticeable inflation, however, rarely occurs as a direct result of companies' trying to cover higher minimum wages.

But the thing is, the aforementioned job growth more compensates for this inflation. Because more people are buying more things, jobs are not only more secure, they are better paid.

Side note: Eating the cost of minimum wage increases out of the profit margin makes publicly traded companies that rely on minimum-wage employees less attractive on the stock market. That said, because eating the cost out of the profit margin is the norm, the effect is closer to universal for all companies relying on minimum-wage labor. And provided shareholders still want the safety that comes in portfolio diversification--and most do--they will still maintain a large portion of their investment in these companies (as opposed to shifting their money to sectors not employing as many minimum-wage employees).

For the empirical evidence I'm sure you want, take ten states, Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Rhode Island, Vermont, and Washington, that have implemented policies that make minimum wage automatically increase to match the cost of living, otherwise known as a Cost of Living Adjustment (COLA). This is to say after a period of so many years, their minimum wage is automatically increased an amount determined by the preceding period's increase in the cost of living. If minimum wage increases led to inflation increases, then what you would see in these states is a death spiral of inflation; minimum wage would increase, then inflation would increase, then minimum wage would increase more drastically, then inflation would increase more drastically, and so on and so on. Yet, these states' inflation rates according to the Bureau of Labor Statistics' Price Index for Urban Consumers have remained on par with the national average.

And so, the question I have to ask is why do so many people believe this thing that is not true--that minimum wage increases cause inflation? Let's look at what has been going on:

Over the past 20 years, according to the same Bureau of Labor Statistics' Price Index for Urban Consumers, prices have increased 3.3% per year on average while minimum wage has increased 2.7% on average. The same trend has been happening with middle incomes. (And this does not include the the offshoring of low and middle income labor to countries that require far lower wages and have far fewer effective environmental, safety, and compensation regulations.) This means that there is a huge and still growing gulf between prices and costs of labor. The question is, "Where is the money in this growing gulf going?"

To be sure, some of it is going to more expensive production. However, most companies have their own barrier of implementation for new technology and expansion, which is to say that the cost of implementing technologically advanced equipment or to expanding must pay for itself in a certain number of years; otherwise, it is too much of a downer on profits and will drive away shareholders. This means that the proportion of the budget for equipment and expansion really doesn't change that much, and companies simply wait for the technology to cheapen to the point of becoming accessible.

So, if we know that on average in the US (A) the proportion of companies' budgets allocated to payroll is increasing far slower compared to prices, and (B) the proportion of the budget allocated to equipment is not increasing, then we also know that (C) profits are taking the lion's share of this gap in payroll

Profits go to shareholders, and the most-wealthy people in America and the world tend to make their wealth from holding stock. So for further evidence of where this gap between price growth and pay growth is going, we can take a look at the increase in their income compared to the rest of incomes. I think that most of us, no matter where we sit on how to deal with this issue or even if we should, already know this figure. We know that the income of the top 1% has been more than doubling every decade while middle and low incomes fail to match price inflation and that between 2009 and 2014, according to Bloomberg, 93% of income growth has gone to the top 1%.

And that brings us to the answer for why so many people believe this untrue thing about minimum wage increases causing inflation: the number of people who own a good portion of the means of spreading information, the media, happen to be in that top 1%.

If they posed the issues as "Don't raise minimum wage because it will put a dent in the profits from which we derive our insane wealth growth", not many people would jump on that bandwagon, so they peddle some falsehoods about it increasing inflation. Why? These same media-owners know that the average citizen doesn't engage in empirical studies of the economy and are, consequently, likely to fall prey to theoretical exercises like "if wages go up, prices have to go up", which sound right and play on our fears because we don't want our grocery bills, car payments, or utilities to increase, but which have been proven false.

In other words, media conglomerates representing the interests of people who make their wealth from a growing gap between payroll and prices are engaged in spreading a theory proven false because this fear mongering not only gets the average person on their side, but also arms them with false information to spread.

The fact, remains, though:

1. No, prices don't directly go up in any noticeable way;
2. Job growth compensates for the price increases because more demand for goods translates into more demand for employees, and more demand for employees means a more competitive job market.

Everything I've said so far has been fact of how things are and have been. Here, though, is a forecast: the current system is not sustainable even for the wealthy. The wealthy are all competing against each other in the market, in politics, and in public support. This leads them to operate in the short to mid term and with an isolated view of how X, Y, or Z will effect their pockets and the pockets of their shareholders.

The result in the last 40-50 years has been the pushing through of a lot of policies, non-enforcement strategies, and, now, alternative arbitration bodies that have been beneficial to individual companies, but harmful to the average employee/consumer and, consequently, the economy as a whole. And it can't last, not even for the wealthy.

And coupled with it has been a takeover and expansion of that fourth branch of the government, turning it into a massive force for popular disinformation to get people to go along down this self-destructive path.

When it comes down to it, they wealthy have their roots in regular consumers, and just looking at it as a numbers game, you can only prune down so many roots before you kill the tree. And none of this is even considering the growing social costs and the diminishing quality of life this brings due to the increases in poverty, crime, disease, and upheaval that unemployment brings.

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