If you’re someone who works minimum wage, the idea of a pay raise is likely music to your ears. Opinions are divided on the question of whether raising the minimum will improve or worsen inflation however. Here’s an overview of how wage hikes have affected the US and EU and what with differing opinions on inflation and the economy.
Raising minimum wage in the US
Since 2009, the federal minimum wage in the US has been set at $7.25 per hour. Many states and cities have raised their minimum wage in recent years, with some aiming to eventually reach $15 per hour. The impact of these wage hikes on inflation is a topic of much debate.
Advocates of an increase in the minimum wage point out that it will provide additional income for low-wage workers, and this money can be pumped back into the economy. Proponents of a higher minimum wage contend that doing so will help to reduce income inequality, an issue prevalent in the United States.
Those who are against raising the minimum wage fear that businesses may restrict hiring or even let go of workers because they would have to shell out more for labor. They also argue that higher wages will lead to higher prices, as businesses will pass on the increased labor costs to consumers.
Wages across Europe
In Europe, the minimum wage varies widely by country. Some countries, such as Germany, do not have a national minimum, while others, such as France and Spain, have relatively high minimums compared to their economies.
Advocates for higher minimum wages claim that such an action would decrease poverty and inequality, as well as increase consumer spending and economic growth. Opponents argue that higher minimum wages will lead to job losses and reduced competitiveness for businesses, particularly in industries with low-profit margins.
Comparing best and worst case scenarios
Looking first at the worst case scenario wherein raising the minimum wage will worsen inflation. According to this view, businesses will pass on the increased labor costs to consumers, leading to higher prices for goods and services. This, in turn, will lead to significantly worse inflation.
Critics of a higher wage argue that it will also lead to job losses, as businesses will need to cut back on hiring or even lay off workers to compensate for the increased labor costs. They also argue that inflation will erode the purchasing power of low-wage workers, making them worse off in the long run.
Now the on the opposite side of this argument is more optimistic view that posits raising the minimum wage will make inflation better. According to this view, low-wage workers will have more money to spend, which will increase demand for goods and services. This, in turn, will lead to higher production and employment, boosting economic growth.
Advocates of a higher minimum wage believe it will lessen poverty and narrow income gaps, as well as stimulate consumer spending. They point to research showing that raising the minimum wage has little to no impact on employment level
Ultimately, the impact of wage hikes on inflation and the economy will depend on a variety of factors, including the level of the wage hike, the state of the economy, and the behavior of businesses and consumers. Moreover, there’s some evidence to suggest that the business industry (be it retail, medical, hospitality, education, etc) is wildly different in terms of how wages improve or worsen the economy.