One of my coworkers tossed out this line today: “We can’t just increase the minimum wage, because that would cause inflation”. I said at the time that didn’t have to be the case, and I just thought I’d capture my reasoning in writing.
Inflation occurs because prices go up. Prices go up because:
a) costs have gone up, putting pressure on the profit margin; OR
b) people are willing to spend more.
When prices go up, that tends to feed back into A – so inflation causes a feedback loop on itself. So a sudden injection of money can be inflationary (because people have more money to spend – reason B), especially if the money is in the form of pay increase, as that’s an increase in costs (reason A).
But – having more money doesn’t mean people have to spend more on the same things – e.g. more on food and other essentials. Instead, they could take the extra money and spend it on new things (or, heaven forbid, save it!). Spending on new things is good – it causes economic growth.
Nor does increase wages have to increase costs. For the last few decades, we have seen salary budgets go up faster than inflation. It’s just not even – the top end of the spectrum has grown faster than the bottom end. Businesses are happy to pay above-inflation wages to upper management, while at the same time keeping pressure on the bottom end. Simply by changing this around, we could see the minimum wage earners grow faster than inflation.
All but one of the greatest economic advances in history have all occurred from increasing the effective minimum wage. Serfdom in Europe was abolished as a result of the Black Plague – manpower became too valuable, and the serfs (those who survived, anyway) could demand high enough wages to break out of feudal dependency. In the early 20th century, industrialists like Henry Ford had a vision of consumerism where people were paid enough to afford the items they made. Henry Ford said something like “the secret to success is to make the best product possible, for the lowest price possible, while paying the highest wages possible”.
The current focus on trying to squeeze costs by controlling the minimum wage (without controlling overall payroll costs) will ultimately be self-defeating. It’s an argument that will continually see low-end wages fall, in real terms, establishing and entrenching the working-poor of the 18th and 19th century all over again. We’re already well down on that path – income disparity is huge, and asset-disparity is even worse, and the problem accelerates every year.