Economics

Why would raising the minimum wage to $15/hour be good or bad for the macro economy in the short run? Explain

ANSWER

The Effect of Raising the Minimum Wage to $15/hour to the Macro Economy in the Short Run

Raising the minimum wage has been an issue over the years. There are conflicting views on whether increasing the minimum wage leads to inflation. From a macroeconomic perspective, raising the minimum wage impacts the labor market, which leads to inflation. Considerably, raising the minimum wage develops an artificial floor in the labor market, which causes inefficiencies and distortions. Raising the minimum wage to $15/hours would be bad for the macro-economy due to wage-push inflation and demand-pull inflation.

Wage-push inflation is a phenomenon in which aggregate demand exceeds aggregate supply, driving up the price level (Šauer, 2018). The wage-push inflation occurs when workers can claim their entire product of labor as wages. When the minimum wage increases, the employees receive a greater share of revenue than what they are due, thus driving up prices.

Increasing the minimum wage leads to demand-pull inflation due to the imbalance between the aggregate demand and supply. Increased minimum wage means that money chasing goods increases, and prices will rise or stay high. This is because when workers get a pay rise, there is a rise in consumer spending which increases the aggregate demand. When the aggregate demand in an economy is high, it outweighs the supply, thus leading to higher prices (Šauer, 2018). Firms can pass the cost of high wages onto consumers by increasing prices which leads to inflation. Ideally, an increase in wages leads the employers to raise the prices charged for services and goods to maintain their corporate profits. For instance, in the US federal minimum wage increase in 1990-1991, the average prices for goods and services increased following the adjustment in the minimum wage increase.

In summation, the main macroeconomic variable affected by an increase in the minimum wage in the short run is inflation. The cost of services and goods within an economy is likely to increase with time, damaging the economy. Therefore, increasing the minimum wage to $15/hr is bad for the macro-economy due to demand-pull and wage-push inflation.

References

Šauer, R. (2018). The macroeconomics of the minimum wage. Journal of Macroeconomics, 56, 89-112.