Inflation Numbers Show a Minimum Wage Hike Is Still A Bad Idea

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Like a slasher movie villain who refuses to die, the push to raise the federal minimum wage to $15 an hour seems to have a supernatural resistance to anything that ought to kill it, in this case logic, evidence, and recent economic history.

Granted, the current federal minimum wage, $7.25, is pretty low, but regular median wages have been naturally rising far beyond that level due to basic supply and demand, which eliminates the need to increase the wage floor. In fact, there is evidence that wages are rising so fast that they are contributing to inflation. Raising the minimum wage to the $15 level activists want would likely make inflation rise even faster, eroding everyone’s buying power and leaving low income households even worse off.

Yet a federal wage hike is exactly what some are pushing for. President Biden proposed a $15 minimum  in his State of the Union address. Legislation to that effect has 201 cosponsors in the House and 37 in the Senate. Unions say they’ll keep up the pressure. “Fifteen dollars, when we were fighting many years ago, sounded high,” AFL-CIO President Shuler told Bloomberg this week. “But today it’s continuing to lose value if we don’t index it to inflation, so we think that’s the baseline.” Her new proposal? $24 an hour.

This push comes amid a period when a drastic labor shortage has caused wages and earnings to rise. The starting hourly wages for workers at retailers like Target already range between $15 and $24. The average rage hourly earnings for all employees on private nonfarm payrolls is currently $31.58, up 5 percent in the last year according to the Department of Labor. Employers are hiking wages to fill vacancies.

This is at a time when inflation has spiked as well. The Consumer Price Index rose 0.8 percent in February and is up 7.9 percent over the past year. Rising wages and rising prices are likely feeding off each other, a situation known to economists as a wage-price spiral. Wages rise to keep pace with inflation but the added consumer buying power fuels further inflation. Goldman Sachs analysts have warned:

[T]he combination of very high inflation, hot wage growth and high short-term inflation expectations means that concerns about falling into a wage-price spiral deserve to be taken seriously.

That’s not to say that wage gains aren’t welcome. They’re still more money in workers’ pockets. Inflation is simply the risk that the economy runs when workers earn more. But any wage gains should be limited to what emerges naturally from employers competing for workers. That’s the market saying that those workers’ labor is now worth more. Artificially raising the floor through a higher minimum wage will push labor costs higher even in areas where there is little demand from employers. That’s a recipe for hurting workers, not helping them.