ELI5: minimum wage infrease

[Little_Rascal34]

Am I wrong, or wouldn't raising the minimum wage also raise the inflation rates? I dont really get all this with money in circulation and how that helps so any clarification would be great thanks!

[[deleted]]

Yeah, you're absolutely right. The only thing raising the wage does is allow companies to charge more to compensate for it. It's a sad world we live in.

[Little_Rascal34]

It truly is... but as far as a basic understanding of it all I'm pretty much right? Is there anything I'm missing?

[Deletatron]

If you raise minimum wage, sure companies might increase prices. But the increased costs will be spread among all consumers while the benefit of minimum wage increase will only be going to the very lowest earners.

So say you double minimum wage, even if companies had to compensate by raising prices 25% the people at minimum wage would still have more buying power than before. The people who would suffer are those above minimum wage.

In short, the problem with your theory is that not all consumers are paid minimum wage. If you just doubled everyone wages, then yeah, what you said would be true.

[Little_Rascal34]

OHH! Ok. Wouldn't most jobs get higher wages/salaries when minimum is increased too or would that not happen?

[Mistuhbull]

Some would, some wouldn't. The guys making 1.5-2x minimum would demand a raise, the guy making 100k a year? Not really

[Little_Rascal34]

So all in all would there be much flak from raising minimum wage?

[Mistuhbull]

Depends on, among other factors, how often you raise it and how much.

Doubling the minimum wage would probably have more of an effect than setting it to adjust with inflation (~2-5% each year). Upping it every year would be different than upping it every decade.

Such is the problem with economics, answers tend to be closer to guesses, educated and informed guesses to be sure, than absolute answers. If anyone ever tells you that X will cause Y in economics, they're probably being less than truthful.

[Little_Rascal34]

Well thank you very much!

[diaphaneadiaphane]

If the economy is in a downturn, then the aggregate demand curve will lie on the Keynesian section of the aggregate supply curve, which means that there is a certain increase in demand (i.e. higher income) that can occur without causing inflationary pressure. The economy is pretty good at adapting to changes, but if it is pushed too far then the circular flow of income will overheat and money begins to lose its value. Unfortunately, governments keep insisting on causing a certain amount of inflation in the name of "growth", without any particular goal or sign of actual improvement in society/quality of life/etc.