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The effects of minimum wage

By Paige Williams and Katie Martin

This graph show the Consumer Price Index and the federal minimum wage. In general, the minimum wage has appeared to move up with prices. This is notable because it suggests that since minimum wage was enacted the real purchasing power of those who receive it has not changed significantly.

How are minimum wage and CPI related?

This graph shows real GDP from 1970 to 2017. Is there a correlation between the relationship of minimum wage and CPI and GDP? Are there any specific years that insinuate this correlation?

Real GDP means that it is adjusted for inflation. Our economy is growing over this time yet the minimum wage is only tracking with inflation. This means that in macro terms, those who receive minimum wage have a smaller portion of the income in our economy now than in 1970. Accounting for inflation, should the federal government raise minimum wage? What are the possible short term and long term affects, especially as it relates to the labor market?

18 thoughts on “The effects of minimum wage

  1. perelk20

    Clearly there is a relationship between all three metrics shown above. To me it would seem that raising minimum wage would patch one issue while opening up another one. Raising minimum wage means less room for growth at the GDP level. To add to this, unemployment will rise as businesses will be forced to make cuts at the base employee level. People who keep their jobs will see an increase to their personal disposable income and inherent consumption. Also raising minimum wage raises CPI which depending on the lens you look at it through. Raising wages is far more complex than simply raising the price floor.

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  2. lentza20

    I think that the implications of increasing minimum wage are very wide, and therefore make it a major political issue. As seen on the graph, the minimum wage rate has been increasing with inflation, yet that doesn't mean it is always equal with the Consumer Price Index. However, raising the minimum wage to be too far above the CPI can be bad for the economy as a whole as small businesses struggle to pay the new higher wages. At the same time, if the minimum wage is not increased at least to keep up with inflation, people who are working minimum wage jobs will have no way to live, and will rely heavily on the government for assistance. Minimum wage is a double edge sword, and as we saw in the first graph, the government has a difficult time matching the growth of minimum wage with that of CPI. The best bet the government has is to keep minimum wage consistent with inflation, and to never let if fall too far below CPI so that people can maintain a good standard of living, and not go too high so that businesses don't have to fire employees because they can't pay their wages.

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  3. hermana20

    The minimum wage under the FFLSA seems to clearly mimic the CPI for all urban consumers. Over time, the minimum wage is either slightly higher or slightly lower, closely following the CPI. As lentza20 mentioned, it is good if the minimum wage never falls too far below the CPI and does not rise too far above. As of the now, the minimum wage seems to be right on the CPI which is perfect. If a country experiences an extraordinary time, such as the U.S. did after WWII, then increased productivity and rising GDP will lead to higher real minimum wages, and people will fell wealthier, and rightly so. Levinson touches on this when explains how global average income per person grew annually by 2.92% from 1950 to 1973, making everyone better off.

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  4. johnsonj20

    The Great Recession of 2008-2009 slowed aggregate demand, which caused a decline in prices (including wages) and GDP (as shown in the first graph). Levinson discusses the danger of lower wages in the context of the recession of the 1970s. Slow wage growth during that time (in fact negative after inflation) corresponded to a decline in the labor share, which is the proportion of national income paid out to workers (Levinson 139-141). The effects were a spike in income inequality, higher unemployment, and less job security (142-143). Laid-off workers had to rely on government assistance to get by, and the economic well-being of the average American plummeted (143). Long-term effects are a budget deficit and appreciation of the dollar as the government borrows to finance the debt. The effects of higher wage, on the other hand, would be lower unemployment, inflation, a budget surplus in the short-run.

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  5. patelp20

    he relationship between CPI, Federal Minimum Wage, and real GDP seems to be a positive correlation. This is signified by the financial crises of 2008-09 where all three of these measures saw a drop, and then a subsequent revival as the economy began to bounce back.
    In terms of raising the Federal Minimum Wage, I think that it is ok to keep it in line with inflation even if the people earning that wage have less money in the economy relative to historical standards.
    "The percentage of hourly paid workers earning the prevailing federal minimum wage or less declined from 3.3 percent in 2015 to 2.7 percent in 2016. This remains well below the percentage of 13.4 recorded in 1979, when data were first collected on a regular basis." (https://www.bls.gov/opub/reports/minimum-wage/2016/home.htm)
    There are less people earning minimum wage now than in past years so it makes sense they have less money in the economy. Also, a lot of people earning that wage are dependent to people with larger incomes and are usually younger and have less financial responsibility.

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  6. Chris Vogel

    The issue when dealing with a macroeconomy is side effects. In this case raising the minimum wage would increase the income of those who are being payed at or around the minimum wage. But it will likely cause an increase in unemployment, since businesses do not want to drastically increase their biggest cost that is employment. Both of these effects will be played out through the macroeconomy via the multiplier effect, as those who are now being payed more will increase expenditure, while those who aren't employed anymore will likely cut spending. In the short term, given Trump's tax cutting plans, an increase in the minimum wage would likely cause the government to support a lot more unemployed people. Since the government will already be running a deficit from this supply-side tax cut, this could create issues with the government deficit and interest rates similar to when Reagan was in office. It could also create perverse incentives that would force the US manufacturing sector to be diminish as imports would be relatively cheaper. In the long run, all prices should theoretically adjust to equilibrium, wages included. So an increase in the minimum wage right now would not have any significant effects in the long run as long as the increase is reasonable.

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  7. thaia19

    It would appear the the government has used CPI as a metric for what the minimum wage should be, given the fact that minimum wage follows CPI very closely in the graph. Raising the minimum wage would benefit minimum wage earners, but since it would be more difficult for businesses to employ people with a higher minimum wage, so some people could lose their jobs. However, raising minimum wage could stimulate the economy, as those extra dollars spent on minimum wage could help stimulate the economy.

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  8. Juliana Kerper

    It is stated that keeping the minimum wage consistent with price increases/increases in the CPI means there is no real change in consumers' purchasing power. Clearly, whether or not the government increases minimum wage depends on the current level of inflation. However, I wonder how this fact compares with the claim that minimum wage today cannot provide the same standard of living (comparatively) that it used to. In effect, this common argument against the first point appears to say that real purchasing power has decreased. I feel like the government should increase minimum wage, perhaps gradually. The biggest fear revolving around minimum wage increasing is that employment will have to take a hit. Perhaps a gradual increase could reduce businesses' turnover and lead to increased productivity, thus countering the need to cut employment or raise prices.

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    1. yuy20

      Increasing the minimum wage can also increase workers' level of consumption therefore increasing GDP and can start a multiplier effect for the larger economy. I think the CPI measure can help adjust the minimum wage but perhaps not as effective as the PCE. The CPI is not adjusted enough for changes in consumers' consumption preferences or substitutes. However, the PCE is more flexible and adjusts faster to changes in preferences.

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  9. gutierrezcuadras20

    According to the first graph, it looks like since the Great Recession, inflation (reflected in the CPI line) has stayed below the minimum wage. If inflation is low, then increasing the minimum wage would cause prices to increase as businesses will need to compensate for paying their workers more. Businesses never want to lose money and will always try to maximize profits. I imagine that by requiring a higher minimum wage, businesses will either increase prices or will have a lower incentive to hire more people. Rapid growth in the labor market would accordingly decrease.

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  10. Nate Abercrombie

    The federal minimum wage serves as the universal baseline for how much employers are required to pay their workers, no matter if they're in backcountry Tennessee or metropolitan San Francisco. Considering the radically different costs of living in those areas, it makes sense that they should pander to the people in cities who need higher wages just to pay basic rent and have food. Although a person in a rural area may not explicitly need to make more to survive, the person in the city probably does. This is a case to be made for raising the wage, but their are several to be made against doing so. Raising the federal minimum wage would have many adverse effects throughout the entire macroeconomy. One of these would be that employers would likely have to lay off more workers (especially if the wage were to double like some politicians are suggesting). This would result in an increase in the unemployment rate and therefore the benefits provided by the government, increasing the deficit. This would likely apply some inflationary pressure on the dollar and likely devalue it, further hurting the working class.

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  11. hartigank20

    According to the first chart, minimum wage and inflation are positively correlated and they each follow each other very closely. This displays how minimum wage hasn’t actually increased based on purchasing power but rather been unchanged. The debate for a higher minimum wage has been prevalent in our politics today. If we raise minimum wage, workers will have to be laid off to account for businesses paying for higher salaries. This will cause unemployment to rise. So, an increased minimum wage may help some but also will lead others out of a job. Also, to account for the increase in salary, businesses will likely increases prices of products to keep their profits similar to before the minimum wage increase.

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  12. Lukas Campbell

    It seems like when the Federal government bases minimum wage off of CPI, it is not a perfect adjustment in line with the changes in CPI. Rather, after some years of CPI increase, the minimum wage jumps up so as to catch up with the current purchasing power. This could contribute to why every few years there are increased demands for higher wages; minimum wage workers' purchasing power goes down as prices increase at a higher rate. While raising the minimum wage more frequently seems like a reasonable solution to this issue, it comes at the cost of potentially higher unemployment as companies need to cut back on spending.

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  13. wilkinsonw20

    There definitely appears to be a positive correlation between minimum wage, CPI, and GDP. During the 2008 recession, you can see that both GDP and CPI felt that shock based on their brief decline. Minimum wage on the other hand actually increased during this time which I found surprising. Regarding the decision to raise the minimum wage, there are many pros and cons related to this type of change. Raising the minimum wage would cause businesses to rethink their current business models. Prices for goods and unemployment would rise. Business owners will be less likely to hire or employ as many employees at a higher cost. The argument that the current minimum wage is not enough to support people is viable, however it depends on where you live. The minimum wage should be adjusted based on geographical location. Those in larger cities require a higher minimum wage than someone living in a more rural area.

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  14. motturt20

    The CPI is determined by the state of the economy, and it's fluctuations are not decided by any one group of individuals. Conversely, the minimum wage is a politically set line that, although usually changed in response to economically brought on changes, is technically set by a fixed and relatively small group of individuals, none of whom expect to ever actually depend on the minimum wage rule themselves. Nonetheless, this correlation shows the tendency of lawmakers to set policy such that the standard of living for those on minimum wage will remain fairly constant in proportion to the CPI. As for the GDP-CPI correlation, both graphs shown have a growth factor of around 3.5 from beginning to end, showing the dependency of CPI on GDP. Raising minimum wage has the bonus of equalizing wealth distribution as well as a theoretical increase in productivity in the long run, with the drawback of less expendable funds for smaller companies and lowered incentives for "on the border" workers to seek out harder jobs with slightly higher salaries.

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  15. blaira19

    These components of the graphs seem to coexist together as minimum wage has been adjusted over the decades to closely fit the CPI trend. Even though raising minimum wage is a political issue in that small businesses won't be able to keep as many workers because the owner won't be able to pay more than what he is already paying his/her employees. It does seem reasonable that minimum wage should coincide with CPI because people who receive minimum wage need to have more money in order to buy everyday necessities.

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  16. grims20

    I think there are very many implications to raising minimum wage, both good and bad. To name a few, raising minimum wage would place more money in the pockets of workers, but would also be potentially very harmful to small businesses struggling to survive in the economy.
    Also, raising the minimum wage to, for example, $15, will not have much of an impact on raising our nation's GDP. " If we exclude all taxes and assume 100% of the increase was spent on various goods and services, it would equate to 0.23% of total U.S. GDP ($40.8 billion / $18 trillion). This increase, even if completely spent (which is doubtful), would not be very significant." Therefore, the argument many provide that raising minimum wage will spur large economic growth is somewhat false.
    https://www.forbes.com/sites/mikepatton/2014/11/26/the-facts-on-the-minimum-wage-increase/#83832b633a1d

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  17. Robert Griffin

    The top graph is a perfect example of sticky wages. You can see that the CPI line is relatively smooth and steadily increasing, but the minimum wage goes up more like a staircase and is bumpier. Minimum wage does not get raised on a cent-by-cent basis to match rising CPI's, so that is where this staircase effect comes from as well as stickier wages in the face of rising prices. It absolutely makes sense that Real GDP graph would correlate almost perfectly with the CPI graph. Consumer Price Index fluctuates and is determined by inflation, whereas Real GDP accounts for inflation. All in all, all three of the graphs are extremely correlated and feature similar macroeconomic principles.

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