The US Senate Votes To Raise The Minimum Wage

InflationThe debate over whether or not to raise the minimum wage is always heated. Politicians always talk in circles on this (and most) issues, so most people don’t get a full understanding of why it’s so controversial or how it affects them.

A lot of people see this as big business vs the little guy, but it’s more complicated than that.

Raising The Minimum Wage Causes Inflation

Since the minimum wage is the bottom or base wage, raising it creates an increase in the cost of many goods and services. This inflation eventually trickles out over time to other goods and services that are not directly affected by the increase. Inflation also causes other, higher wages to increase over time as people look for better compensation to pay for the higher cost of living.

To combat a rise in inflation, the Senate is proposing to package an increase with a number of provisions as follows:

Besides increasing the minimum wage from the current $5.15 an hour, the bill would extend for five years a tax credit for businesses that hire the disadvantaged and provide expensing and depreciation advantages to small firms. The tax breaks would be paid for by closing loopholes on offshore tax shelters, capping deferred compensation payments to corporate executives and removing the deductibility of punitive damage payments and fines.
~ AP Article

How Inflation From A Minimum Wage Hike Affects You

For minimum wage earners. Over time, inflation will erode the gains made from an increase in wages. In the short to medium term though, this is a great thing for many minimum wage earners. But, there are some businesses that will be forced to lay off employees because they simply can’t afford the increased costs. After a lay-off, the remaining employees will be tasked to get more work done, and will most likely have less capital assets (like new equipment) available from the company to make their jobs easier.

For higher wage earners. Wage increases for higher income earners will most likely be held back or will not be as high as they otherwise might be. The number of management positions could also be pared back because the savings from laying off one management position could pay for the wage increases of several minimum wage workers.

Rainy day and retirement savers. A lot of personal and corporate retirement funds include stocks or mutual funds (collections of stocks). The performance of these investments is directly tied to the earnings performance of large public companies, otherwise known as “big business”.

Small businesses. Inflation hurts the small business owners ability to expand the business and employ more people. This is important because small businesses are responsible for many new jobs for the ever growing population. Small businesses that get hit hard by minimum wage increases may have to lay off some workers. Some of them may even be forced out of business. Many small businesses have a hard time passing on increased costs to their customers unless they have very specialized goods and services with little competition and good demand.

Large businesses. Like small businesses, the amount of cost increases that a large company can pass on to the customer depends upon their market competition and the level of demand for their goods and services. If they have trouble passing on the increases then the decreased profits they earn adversely affects their stock price. This not only hurts the companies ability to grow, it also hurts private investors who are saving for retirement and large pension funds that are invested in the market.

What It All Means

An event like increasing the minimum wage changes the landscape for everyone. Some people will find a way to make it work in their favor and others will be hit hard by inflation and cost increases. Whether you do well or not is more dependent on business savvy and your understanding of how money and markets work rather than how big you are. Of course, the bigger and more successful you are, the more resources you have to make good decisions.

In the end, increased population and competition for wealth, land, and natural resources creates a wider divide between the haves and the have-nots. At the same time, the entire economic system relies on growth just to remain stable. The need for growth and the friction caused by growth is what makes this and other issues so complicated.