Minimum Wages And Inflation

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By Robin Anderson, Ph.D., Senior Economist, Principal Global Investors

In the United States, the Federal minimum wage has been $7.25 since 2009. Since 2014, however, 26 states have raised their minimum wage. There has been a push to bring the national minimum wage to $15 and some states and cities are leading the charge. For instance, California and Washington D.C. will have a $15 minimum wage by 2020, New York State will reach $15 by 2021, San Francisco will move to $15 in 2018, and Seattle to $15 by 2017. It's also worth noting that a slew of large corporations have raised wages of their lowest paid workers too, including JPMorgan (NYSE:JPM), Wal-Mart (NYSE:WMT), Starbucks (NASDAQ:SBUX), Costco (NASDAQ:COST) and McDonald's (NYSE:MCD). According to the Wall Street Journal, all of these pay raises finally pushed wage growth of the lowest paid workers above that of the median worker for the first time since the great recession. Higher wages are great for workers and their families but economists wonder whether or not those wage increases lead to higher prices for goods and services.

Older academic literature found that a higher minimum wage led to modestly higher prices. A 2004 survey found that higher minimum wages, "increased food prices by no more than 4% and overall prices by no more than 0.4%."[i] Current anecdotal evidence suggests prices are rising particularly in the food service industry, where the overwhelming shares of minimum wage or sub-minimum wage workers work.[ii]Restaurant profit margins are slim too, so the food service industry is more likely than other industries to pass on higher costs to consumers. The LA Times, in an April 2016 article, reported that one restaurant owner in Emeryville had to increase prices between 5% and 15% to compensate for higher minimum wages ($12.15 for small businesses and $14.44 for larger businesses). According to a July 2015 Chicago Tribune article, one restaurant owner raised prices by 10% to compensate for higher labor costs.

Academic research has started to estimate potential impacts of the most recent minimum wage increases. The Heritage Foundation estimated that a $15 minimum wage could force fast food prices up 38%.[iii]Berkeley's Center of Wage and Employment Dynamics examined the impact of a $15 minimum wage in New York. Across all industries, they found higher wages could lead to a 0.14% gain in prices in each year as higher wages are phased in.[iv] A University of Washington study looked at the actual impacts of a higher minimum wage in Seattle on a broad range of economic variables. In their initial findings, the group found little statistically significant impact on prices in general but potentially more meaningful impacts on restaurant prices.[v]

The general trend in food away from home inflation from the Consumer Price Index (CPI) has been up. Overall food away from home inflation rose from 1.9% year-over-year in October 2013 to 3.1% in February 2015. It's currently at 2.8%. At the same time, wages for workers in the food services industry have been growing at the fastest pace since the end of the recession, up 4.5% year-over-year.

However, a lot of other factors constrain overall inflation. For instance, goods and commodity prices are declining. Commodity price inflation has been negative since October 2014. In fact, with excess supplies of food commodities ranging from dairy to grains, food at home prices have collapsed - most recently down 1.6% year-over-year, the largest decline since 2009. Overall services inflation is increasing; but a 2.4%, it's still well below prior cycle peaks. A tighter labor market, in general, should continue to put modest upward pressure on services inflation. However, even with higher minimum wages, overall hourly wage growth of 2.6% is well below previous cycle peaks. Higher minimum wages may modestly affect overall prices, but in this world of slow overall wage growth and excess capacity of goods and commodities, it's surely not going to lead to runaway inflation.

[i] Lemos, Sara. "The Effect of Minimum Wages on Prices." IZA Discussion Paper No.1072, March 2004.

[ii] According to 2014 Pew Research Center work, as of 2013, about 47% (or over 1.5 million workers) of minimum wage (or below) workers were in the food preparation or serving jobs.

[iii] Sherk, James, "Higher Fast-Food Wages: Higher Fast-Food Prices," The Heritage Foundation, Issue Brief Number 4272, September 2014.

[iv] Reich, Michael, Allegretto, Sylvia, Jacobs, Ken, and Montialoux, Claire, "The Effects of a $15 Minimum Wage in New York State," Policy Brief, Center of Wage and Employment Dynamics, Institute for Research on Labor and Employment, University of California, Berkeley, March 2016.

[v] Hill, Heather, Otten, Jennifer J., van Inwegen, Emma, and Vigdor, Jacob, "Early Evidence of on the Impact of Seattle's Minimum Wage Ordinance," University of Washington, January 2016.