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Raising the minimum wage allows for a (very) short term benefit, but in the medium and long run, it drives inflation up. The minimum wage and inflation are effe

by runjake 13y ago

Raising the minimum wage allows for a (very) short term benefit, but in the medium and long run, it drives inflation up. The minimum wage and inflation are effectively proportional.

smacktoward 13y ago
Economists call what you're describing "cost-push inflation." And these days most believe it's a myth. But surely that's just an artifact of liberal Krugmanite thinking infecting our institutions of higher learning! Let's see what the reliably conservative Cato Institute thinks: http://www.cato.org/pubs/pas/pa106.html#4 http://www.cato.org/pubs/pas/pa106.html#4 There are several problems with the notion of cost-push inflation. The primary error in this analysis is that it confuses a shift in the structure of relative prices with a general rise in the level of prices. If the labor costs of businesses are increased and they succeed in passing on the costs to consumers in the form of higher prices, they will have managed to change the structure of relative prices at the expense of businesses that are unable to raise their prices because of more-intense competition. This is quite distinct from a general increase in the level of prices, which would be possible only if the real supply of money was increased. Many firms, however, may be unable to pass on their increased costs to consumers. It is consumers who ultimately determine the price of any good on the market, and they may decide that a business's product is not worth a higher price. Producers cannot force consumers to buy what they produce, and businesses cannot always arbitrarily increase the prices of their products simply because the government has arbitrarily increased their costs. Oh. Well, how about free market champion Milton Friedman? What did he think? http://www.investopedia.com/articles/economics/08/1970-stagflation.asp http://www.investopedia.com/articles/economics/08/1970-stagf... Milton Friedman did not believe in cost push inflation. He believed that "inflation is always and everywhere a monetary phenomenon." In other words, he believed prices could not increase without an increase in the money supply. Oh.
eru 13y ago
Interesting. In Germany, people usually fret about potential job losses if a general minimum wage would be introduced (they didn't have one last time I checked), not inflation.
dragonwriter 13y ago
> Raising the minimum wage allows for a (very) short term benefit, but in the medium and long run, it drives inflation up. This is probably strictly true as written, but misleading, as it also provides a medium and long term benefit, as it (alone) drives inflation up less than the ratio by which the minimum wage was increased. > The minimum wage and inflation are effectively proportional. No, they aren't. Even price levels, which could be more reasonably expected to have some relation to minimum wage, aren't simply proportional. If inflation was proportional to minimum wage, places that didn't have a minimum wage would have zero inflation; if price levels were proportional to minimum wage, places that didn't have a minimum wage would have zero price levels. Neither of these is the case.

by runjake 13y ago

Raising the minimum wage allows for a (very) short term benefit, but in the medium and long run, it drives inflation up. The minimum wage and inflation are effectively proportional.

smacktoward 13y ago

Economists call what you're describing "cost-push inflation." And these days most believe it's a myth. But surely that's just an artifact of liberal Krugmanite thinking infecting our institutions of higher learning! Let's see what the reliably conservative Cato Institute thinks: http://www.cato.org/pubs/pas/pa106.html#4 http://www.cato.org/pubs/pas/pa106.html#4 There are several problems with the notion of cost-push inflation. The primary error in this analysis is that it confuses a shift in the structure of relative prices with a general rise in the level of prices. If the labor costs of businesses are increased and they succeed in passing on the costs to consumers in the form of higher prices, they will have managed to change the structure of relative prices at the expense of businesses that are unable to raise their prices because of more-intense competition. This is quite distinct from a general increase in the level of prices, which would be possible only if the real supply of money was increased. Many firms, however, may be unable to pass on their increased costs to consumers. It is consumers who ultimately determine the price of any good on the market, and they may decide that a business's product is not worth a higher price. Producers cannot force consumers to buy what they produce, and businesses cannot always arbitrarily increase the prices of their products simply because the government has arbitrarily increased their costs. Oh. Well, how about free market champion Milton Friedman? What did he think? http://www.investopedia.com/articles/economics/08/1970-stagflation.asp http://www.investopedia.com/articles/economics/08/1970-stagf... Milton Friedman did not believe in cost push inflation. He believed that "inflation is always and everywhere a monetary phenomenon." In other words, he believed prices could not increase without an increase in the money supply. Oh.

eru 13y ago

Interesting. In Germany, people usually fret about potential job losses if a general minimum wage would be introduced (they didn't have one last time I checked), not inflation.

dragonwriter 13y ago

> Raising the minimum wage allows for a (very) short term benefit, but in the medium and long run, it drives inflation up. This is probably strictly true as written, but misleading, as it also provides a medium and long term benefit, as it (alone) drives inflation up less than the ratio by which the minimum wage was increased. > The minimum wage and inflation are effectively proportional. No, they aren't. Even price levels, which could be more reasonably expected to have some relation to minimum wage, aren't simply proportional. If inflation was proportional to minimum wage, places that didn't have a minimum wage would have zero inflation; if price levels were proportional to minimum wage, places that didn't have a minimum wage would have zero price levels. Neither of these is the case.