Inflation, minimum wages and profits: Protecting low-wage workers from inflation means raising the minimum wage

There are two main debates about what to do about inflation. One is mostly bona fide (if there is severe disagreement): it has to do with the Fed’s actions. The other reason is often bad faith: it uses the existence of high inflation as a stick against any progressive political change and as a justification for long-standing ideological priorities. This is most evident in discussions of fiscal policy, where at the same time some people claim that spending should be restricted (a contractionary step in fiscal policy), but taxes should be reduced (an expansionary step).

This bad faith will surely raise its head in discussions of attempts to move toward stronger labor standards as well—say, through an increase in the federal minimum wage. Even under normal circumstances, opponents of minimum wage increases claim that they would be inflationary, so they would almost certainly exaggerate these effects today. In this blog, I make the following points about the relationship between minimum wage and inflation:

  • The fastest inflation makes it more Important, no less, to raise the federal minimum wage. Every year lawmakers don’t raise the minimum wage is a year they did Cuts The purchasing power and living standards of the lowest paid workers in this country.
  • Even under a worst-case inflation scenario where every penny in additional pay resulting from moving the federal minimum wage is passed to $15 by 2027 in the form of higher prices, the result would be a 5-year extension of inflationary pressure equal to 0.1% per year (or about 1 /100 of the increase we have seen since 2021), the inflationary effect will return to zero.
  • Even this very mild inflation could be significantly weakened by other margins to adjust to a higher minimum wage – including a rollback of profit margins that are still high today. During normal times, profits represent about 13% of prices for goods and services, but since the recovery from the COVID-19 recession began in the second quarter of 2020, higher profit margins have accounted for nearly 40% of price increases. When these margins become normal, there will be ample room for non-inflated wage growth.

Faster inflation makes raising the minimum wage more important

Every year the minimum wage is not raised, It is effectively cut off in terms of inflation. These reductions from inflation can multiply very quickly, even over long periods of time without particularly rapid bouts of inflation. But when inflation is higher than normal, the real value of the minimum wage can be completely crushed if lawmakers don’t take action. In just the past two years, the purchasing power of the minimum wage has fallen by 12.2% – a massive blow to workers’ living standards.

In the 1980s, when inflation was much faster than it had been for most of the past 35 years, the federal minimum wage stood at $3.35 between January 1981 and April 1990. During that time, inflation lowered the value of the minimum wage by an amount 46%.

Arguing that the federal minimum wage should be raised only after current inflation has rampaged far into the past argues that low-wage workers should not be seriously protected against the damage to living standards caused by today’s price growth.

Minimum wage increases have negligible effects on inflation

Some claim that raising the minimum wage might exacerbate our current inflation problem. This is not a serious concern. keep in mind raise wages law, which will raise the minimum wage to $15 in five steps by 2027 and will be indexed for growth in average wages thereafter. if every penny From this higher minimum wage directly fueling higher prices—that is, none of which was financed by increased productivity or decreased profits—a move to $15 would result in a gradual one-time increase in the total price level of less than 0.5%. Spread over 5 years, this means inflation will increase to less than 0.1% per year, after which it will fade to nearly zero. This is completely trivial. Over the past two years, the rate of inflation has been about 100 times faster than this rate.

The math on this is relatively straightforward. As part of our analysis of previous versions of the Wage Raise Act (and other increases in the minimum wage), we estimate the increase in the total wage bill caused by a higher minimum wage. That is, we multiply the number of workers affected by raising the minimum wage from its current level to $15 and then estimate the average increase in wages they receive. This includes an estimate of the “indirect” effects on workers earning slightly above the new value of the minimum wage, and we assume no job losses caused by these increases—both of which make our estimate of the effect on the total wage bill larger than it would otherwise.

We’re currently improving our inflation-accounting model for the past year and states that have passed laws that would raise the wages of their workers in the same period that the higher wage bill would be in effect. These new (although not entirely definitive) estimates indicate an approximately $50-75 billion increase (in 2021) in the gross wage bill in 2027. A very conservative estimate of PCE in 2027 (also expressed in 2021) It’s $16.5 trillion (that’s assuming it’s growing at 1% per year for the next five years). That means $50-75 billion in full payment of the wage bill—If financed entirely by price increases –The price level of PCE will increase by about 0.3-0.4% by 2027. Most importantly, this increase will extend over the five years prior to 2027, so inflation will rise by less than 0.1% per year.

Other margins – especially corporate profits – can absorb this little price pressure

Most importantly, even this slight increase is not guaranteed to happen. Previous research has shown that many spreads along with higher prices can be used to absorb higher minimum wages. Productivity may increase or profits may fall, for example.

On this last margin – lower profits – it is important to note that there are Many They have room to absorb a higher minimum wage without being fueled by higher prices. For example, profit margins are up about 30% compared to their pre-pandemic peak, and those profit hikes explain nearly 40% of the price hikes during the recovery period. Even in normal times, increased profits contribute to inflation, but in this recovery, the share of inflation explained by increased profits is more than three times its normal value. In short, lower profit margins are a big potential factor to absorb any price pressures in the coming years – especially those as small as what an increase in the minimum wage might impose.

The figure below shows the share of price changes accounted for by labor costs, non-labor costs, and profits over different time periods. Between 1979 and 2019, profits accounted for 13% of price increases and unit business just under 60%. Since it began recovering from the COVID-19 recession in mid-2020, earnings account for 40% of the increase — three times its regular contribution. Even compared to the peak of the pre-COVID business cycle at the end of 2019, earnings growth is twice its normal contribution to price growth – about 34%.

Lesson learned from this number he is Clear: if We’ll start looking at it Sources of income Which needs to be curbed to keep inflation in check, we must look at corporate profits, not the wages of America’s lowest-paid workers.

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