Inflated Income, Deflated Dollar

 Recently in the United States there has been a debate over raising the national minimum wage. The most common example of this is a proposed increase to $15.00 per hour. A lot of the reasoning behind this is the misconception that minimum wage is meant to support a family. It is not and does not. Minimum wage is meant to be entry level or minimal experience pay. Such as a young adult entering the workforce. This being said, shame on companies that require experience and choose to pay minimum wage. Starbucks for example which pays just above minimum wage and practices inconsistent scheduling making it nearly impossible for a worker to get extra wage to support themselves. Fair wage for fair work.

 There are many aspects to an increase of minimum wage, most notably is inflation. This is an economic term that refers to the generally rising cost of goods and services in a particular economy. One of the most straightforward examples of inflation in action can be seen in the price of a gallon of milk. In 1913 the average price for a gallon of milk was 36 cents. Now in 2021 a gallon of milk on average costs $3.50, this is about an 872% price increase. Unbiased private sector efforts to calculate the “Real Rate” of inflation have yielded a rate of 7% to 13% per year depending on your location. This is many multiples of the “Official” rate of 1% per year.

 There are 3 types of inflation: Demand Pull, Cost Push, and Built-in. Demand pull inflation is the upward pressure of prices that follows a shortage of supply. Economists describe this as “Too many dollars chasing too few goods” this is the most common cause of inflation. Cost Push inflation occurs when overall prices increase due to an increase of wage and price of raw materials. Higher cost of production results in a decrease in total production of goods in the economy. If the demand for the goods hasn’t changed then the increased cost of production is passed onto the consumer. Built-in inflation is related to expectations of the current inflation rates to continue into the future. As the prices of goods and services continue consumers come to expect them to increase at a similar rate, causing a demand for an increased wage to continue their standard of living. These increased wages result in higher costs for goods and services. This wage\price spiral continues as one factor induces the other and vice versa.

 So what seems to be a good thing by increasing the minimum is actually just the opposite. While at first the economy will boom it will be followed by a subsequent economic bust. This will result as an increase to the national minimum wage will not be an increase in the general wage of the consumer. The only people who will benefit are those who made below the adjusted minimum wage. The current national minimum wage is $7.25 per hour, an increase to $15.00 per hour would be a 106.9% increase. This will cause an equal increase in cost of goods and services. It will also cut the savings along with the buying power of the consumer in half. This will in an end result cost the annual standard of living to become too much for the current middle class resulting in more people living in poverty not less.

Information sourced from investopedia.com