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If minimum wages are raised to $15 an hour then would these companies that are forced to raise wages not increase their prices exponentially in order to maintain their current profit? And, if this were to happen would the working class be better off at all? Forgive me if this is a dumb question, my knowledge of politics and economics is very limited.

-Caleb

Caleb
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    I'm going to try to construct an answer, but before I do I should explain that this is a totally reasonable question. In general, one can be legitimately concerned about inflation when discussing an increase in the minimum wage. I am going to try and find you some studies that talk about that relationship. – Publius Aug 04 '15 at 01:09
  • For what it's worth, the usual argument is that if wages are raised then hours get cut - either fewer people are hired or the hired people work less time. I don't think I've seen anyone suggest that prices would go up instead. Which makes this a really good question, because it's not something that's usually addressed. – Bobson Aug 04 '15 at 02:24
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    Shouldn't this be migrated to Economics.SE? – user4012 Aug 04 '15 at 18:43
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    Just because it's On-topic somewhere else doesn't mean that It's off-topic here. Raising the minimum wage to $15 is a current political issue, and it's effects are of interest to politically-minded people. – Sam I am says Reinstate Monica Aug 06 '15 at 14:46

1 Answers1

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You could word that question as:

Does an increase in the minimum wage cause an increase in the cost of goods and services?

And the answer to that depends on who you ask.

Employment Policies Institute (a conservative think take financed by the restaurant industry lobby) says yes: https://www.epionline.org/studies/r100/

Using a variety of government and private datasets, Aaronson and French show that prices do in fact rise in response to a minimum wage increase. Aaronson (2001) finds that minimum wage increases tend to raise prices. The magnitude and timing of these price increases is striking. Within three months of a wage hike, Aaronson finds that a 10 percent increase in the minimum wage resulted in a 0.4–0.7 percent increase in restaurant prices. Much of the increase occurred within the first month of the wage hike. In the fast food sector, prices rise 1.5 percent in response to a 10 percent increase

Truth-Out (a progressive/liberal news publication) says no (albeit it's caveated by saying it's very tiny: 1/10th of 1%): http://www.truth-out.org/news/item/14050-minimum-wage-hikes-do-not-cause-inflation

This fear of inflation from the minimum wage is not based on any reasonable description of how these minimum wage hikes will likely impact businesses, or the economy more generally. The potential impact of minimum wage hikes on the overall price level is simply too small to have any appreciable impact on inflation

Arthur Macewan (professor emeritus of economics at UMass-Boston) offers up a more nuanced not very much answer: http://dollarsandsense.org/archives/2014/0714macewan.html

So what happens when the minimum wage is increased? Consider the situation in restaurants that have a middle-income clientele. Restaurant owners, facing a higher wage bill, would like to pass the costs on to their customers. But their customers are people whose incomes have not been affected much, if at all, by the higher minimum wage. So if prices at the restaurants go up, these people will buy less and the restaurants will now lose some profits. They may raise prices a bit, but not much. Whatever they do, the restaurant owners will have to, if you’ll pardon the term, eat some of the increased costs.

And, in the end, I think Vice (a--well--Vice is Vice) sum it up succinctly: https://news.vice.com/article/what-will-happen-to-the-economy-if-we-raise-the-minimum-wage

The economics of the minimum wage are complex enough, and the historical record inconclusive enough, that economists can make arguments either way. So they do.

I tend to agree with Vice. Economics is complex and the entire minimum wage debate is huge. There's all sorts of factors involved and one has to really look at the debate in context.

PS: Just one example (not saying this is the norm--just that it's interesting and timely), a restaurant in Seattle has recently figured out a way to raise minimum wages to $15 but not raise prices overall by increasing the cost of meals, but doing away with tipping: http://www.king5.com/story/news/local/seattle/2015/07/31/ivars-salmon-house-minimum-wage-tip-service-charge/30968531/ (so, those that used to tip generously are now actually paying less, while the cheap people out there, alas, need to pay a bit more now. :)

  • It sounds like this is less about whether the whole country will be better off and more about how wealth is distributed. – PointlessSpike Aug 04 '15 at 09:48
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    Great answer! I agree that this is a difficult empirical question that won't have a clean answer in the near future. One caveat, the effect on prices is uncertain provided the increase in the minimum wage is sufficiently small. There's debate over whether an increase of the minimum wage to $12 an hour would increase prices or unemployment. There's not much serious debate over whether an increase of the minimum wage to $100 an hour would increase prices or unemployment. – lazarusL Aug 04 '15 at 13:18
  • @PointlessSpike I wasn't intending it to be about either. I was merely trying to answer the specific question that was asked. –  Aug 04 '15 at 14:47
  • @lazarusL that's true. Though I think it's fair to say that the effect on employment has actually been studied to a greater extent (albeit, it's still very debatable) –  Aug 04 '15 at 14:49
  • @blip, I wasn't critiquing your answer, I think it's spot on, I was reading the subtext of the debate. – PointlessSpike Aug 04 '15 at 15:07
  • @PointlessSpike oh! Gotcha. Yea, it seems that that is usually the subtext of most economic debates in this country. :) –  Aug 04 '15 at 15:23