Ryan Guest

Macroeconomics
Impact of Increasing Minimum Wage on Inflation

Table of Contents

Abstract
.3
Inflation
Definition...
..3
Cause
...5
Effect.
..5
Conclusion..
.6
Bibliography
..7

Abstract
As more U.S. dollars enter the economy, prices for consumer and
industrial products and services rise. This paper will outline the issues
of inflation and how they impact the United States. There are several
main factors for the cause of inflation and with that comes some of the
affects. I am going to focus on how increasing minimum wage impacts
inflation. Some people view inflation as a bad thing while other ignore
its affect. This paper will help clear the air looking at the issue from a
macroeconomics perspective.

Inflation Definition
Inflation is the pervasive and sustained rise in the aggregate
level of prices measured by an index of the cost of various goods and
services. (Funk, 2016) As prices increase over and over, the
purchasing power of money become weaker. This negative affect can
3

create serious economic problems and unpredictability. If the inflation

growth is slow, people will see their increased income and will also
increase his or her consumption level. As people spend more money
that they earned, it may stimulate the economy temporarily. This slow
growth of inflation is not very dangerous. If it grows slowly, then the
effects are very minor to the economy.
A much more dangerous version of inflation is when prices jump
up high all in a short time period. A term used for this is chronic
inflation. Chronic inflation tends to become permanent and ratchets
upward to even higher levels as economic distortions and negative
expectations accumulate. To accommodate chronic inflation, normal
economic activities are disrupted: consumers buy goods and services
to avoid even higher prices; real estate speculation increases;
businesses concentrate on short-term investments; incentives to
acquire savings, insurance policies, pensions, and long-term bonds are
reduced because inflation erodes their future purchasing power;
governments rapidly expand spending in anticipation of inflated
revenues; and exporting nations suffer competitive trade
disadvantages, forcing them to turn to protectionism and arbitrary
currency controls. (Funk, 2016)
Hyperinflation is the most destructive and the most radical forms
of inflation. Hyperinflation is so severe that it can cause the death of
an economy. One of the most recent cases of hyperinflation was right

after World War I in Germany. The volume of currency exploded into

more than 7 billion times the normal volume and prices were around
10 billion times the original prices. This took place in just a 16-month
period around November 1923. (Funk, 2016) That is a huge reason why
Adolf Hitler came into power. He came up with solutions to help
Germany fix its economic problems.

Causes
People always feel like they deserve more money for the work
they do. This feeling drives the political topic of whether or not
minimum wage should be increased. Viet Nguyeen argues that
increasing minimum wage does not cause inflation. He did a study in
Vietnam and how an increase in minimum wage did not affect that
economy.
The number of laborers who are affected by minimum wage
increases might be small. According to Nguyen (2009), there are
around 10 per cent of workers who have low-wage and can be
affected by minimum wage increases. In addition, around 60
percent of laborers are self-employed and working for other
households. These groups are not influenced by minimum wage
increases. (Nguyeen, 2011)
While this may be the case for Vietnam, it is not the case for the United
States. We have a much larger population that uses goods and services

that are performed by low-paying jobs such as fast food. The United
States would be heavily impacted by a minimum wage increase that
would impact just about everyone in the country. Another large
difference in Vietnam is the number of self-employed. In 2013, it was
reported by PR News Wire that only 6.6 percent of U.S. citizens were
self-employed. (Hunt, 2014)

Effects
When an artificial price floor, such as an increased minimum
wage, is place on a supply and demand curve, it generates a new
equilibrium. While employees are being paid more for their work,
employers have increased their expenses. I own a business called
SlashTag and if I was required to pay my employees $15 an hour that
would impact my business heavily. I would be required to raise the
prices of our TVs and sound bars in order to stay afloat. Many other
businesses would be in a similar situation. This sudden raise in prices
can cause chronic inflation.
Creating an artificial price floor by increasing minimum wage will
also increase unemployment. Skilled workers will benefit from the
minimum wage increase but the unskilled workers will not. Only the
skill and experienced workers will be getting jobs while the unskilled
and inexperienced will be left in the dark. This issue is more prevalent
in recessions than in expansions. (Sabia, 2014)

Conclusion
It is hard to see the long-term effects of something on a macro
level. It is crucial that as our country discusses issues such as
increasing the minimum wage that we look at all of the data and
possible outcomes. The United States has a very different economy
than most countries. It is important when comparing countries that we
consider the differences and how certain aspects of the country might
be affected. Creating an artificial price floor in our economy will create
a loss of jobs for unskilled workers and cause inflation.

Bibliography
Hunt, R. (2014) CHICAGO, Feb. 6, 2014 /PRNewswire/
Inflation and Deflation. (2016). Funk & Wagnalls New World
Encyclopedia, 1p. 1.
Nguyeen, V. C. (2011). Do Minimum Wage Increases Cause Inflation?:
Evidence from Vietnam. ASEAN Economic Bulletin, (3), 337.
Sabia, J. J. (2014). The Effects of Minimum Wages over the Business
Cycle. Journal Of Labor Research, 35(3), 227-245.
doi:http://dx.doi.org.ezproxy.uvu.edu/10.1007/s12122-014-9180x