When pro-inflation economists try to argue that inflation does not merely have redistributive effects, but can actually increase total production one of their most frequently used arguments (Often stated in implicit rather than explicit terms ) is that inflation can help erode the real value of artificially increased minimum wages set either directly by governments or indirectly by unions. Since minimum wages will destroy job opportunities for low-skilled workers, eroding it through inflation will help increase employment and production. The problem with this argument is however that this benefit is only likely to be short-term since politicians and union bosses is likely to notice the falling purchasing power of the minimum wages they have set and compensate it by increasing it in nominal terms.In this context we can see now how the entire Clinton minimum wage increase in 1996-97 have been repealed through inflation. Between September 1996 (The last month when the old $4.25 minimum wage was in place)and February 2005, the consumer price index rose by 21.55% (191.8/157.8). This means that the current $5.15 minimum wage is $4.24 in September 1996-dollars. The minimum wage is thus lower in real terms now than it ever was before the Clinton increase. And of course, if the consumer price index underestimates inflation, which many of us believes it do, then the current minimum wage is even lower in a historical perspective.
However, we can also see now that the politicians have indeed noted the declining real value of the minimum wage and from what I understand there are two separate bills in the Senate to raise it. One is by Republican Senator Rick Santorum who wants to raise it by $1.10 to $6.25 which would basically restore it to the level it had in September 1997, when the increase to $5.15 was first implemented. Not surprisingly, Ted Kennedy wants to raise it even more ,by $2.10 to $7.25. Most likely the end result will be some kind of a compromise, that is a minimum wage somewhere between $6.25 and $7.25.
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I want to say something about this, but I don’t know what I can say that I haven’t already said about the minimum wage. Still, it’s strange that we can thank inflation for minimizing the harm caused by the minimum wage. Not that inflation’s doing us any real good, though.
BTW, it’s not clear that Santorum actually supports his own bill. Sen. Ted Kennedy and others were attempting to attach his minimum wage increase as an amendment to other bill, including some of particular importance. Sen. Santorum offered and got an agreement for the amendments to be withdrawn in exchange for a floor vote on a separate bill to raise it to $6.25.
That said, the bill to raise it to $6.25 might still pass, and Sen. Santorum might end up supporting it since he’ll be in a tight race with Bob Casey for his Senate seat, most likely. But that’s been the political explanation.
The minimum wage is now $6.75 in California and $8.50 in San Francisco.
A state can impose a higher minimum wage than the national rate. A bill was introduced in Oklahoma to raise the minimum wage, too, but it hasn’t passed yet.
Saying that we should welcome inflation so that we don’t feel the effects of minimum wage so badly is like saying we should cut off our hands so we don’t feel a paper-cut.
Leaving aside the economics of minimum wage, where in the Constitution can you find language that grants Congress the power to set a minimum wage? Proponents of a minimum wage should be fighting for it in the state legislatures, not Congress.
Wow TOF, you are Old.
Here’s some more on minimum wages that people probably aren’t familiar with.
You can implement them in different ways with different trade offs. It’s minimum wage by government fiat that is the most harmful.
You can also implement them indirectly, as Pigovian subsidies, using a negative payroll tax implemented as an offset to a broad based tax on producers (see http://member.netlink.com.au/~peterl/publicns.html for more material on this). With that, the only intrinsic economic problem is if it is set higher than the vagrancy costs currently compounded for by Social Security. There is a cost from “free” trade with countries that don’t undo the vagrancy costs market imperfection, and there is the political-philosophical cost of having it under government control.
Longer run (there are transitional problems) this could be replaced by a guaranteed income system, provided it was set too low to live on without a top up wage and the top up wage needed was low enough for everybody to price themselves into work. Think of it as a negative poll tax (incidentally, states could get the effect of lower minimum wages with poll taxes to claw them back, cutting business taxes to match). That too has the government problem.
Longer term still, government payments could be commuted first to bond payments, then the bonds could be changed for revenue earning assets outside government control – an updated form of Distributism, in which everybody was promoted into ownership. As Chesterton remarked, the problem with capitalism is that there are not enough capitalists. Such a society would need to have customs and institutions like patrimony, so new generations couldn’t forfeit their birthrights, or the vagrancy costs issue would gradually recur.
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