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During a recent speech, Vice President Joe Biden blamed inflation on firms raising prices and urged them that they needed to decrease their business costs while increasing wages. The math is up to you.
In his State of the Union address, President Joe Biden pushed for a $15 minimum wage and criticized companies for inflating the economy. Intermediary policies are all about raising minimum wages and claiming that government expenditure boosts economic growth.
At a time when prices are rising rapidly, it's important to remember that the rising minimum wage has played a role in this development. According to the National Employment Law Project, 74 states, cities, and counties raised their minimum wage in 2021, which is expected to be the same in 2022. For example, the minimum hourly wage in Arizona will rise to $12.80 in 2022 from the current $12.15 in 2021. Only 15 cents were added for the year 2021. As of today, the Colorado minimum hourly pay is $12.56, up from $12.32 a year ago. In addition, California's minimum hourly pay has increased from $13.00 to $14.00.
An increase in wages would boost disposable income, which in turn would lead to greater spending, which would have a multiplier impact on the economy and improve overall aggregate demand. This is the rationale for a minimum wage.
While this argument may appear sound on its own, it is fundamentally at odds with the knowledge that the economy is a web of markets in which every person's life is affected by the activities of all other people and every action has an immediate visible and numerous invisible impacts. Since the interconnection of labor markets puts upward pressure on every other market, which in turn leads to increasing costs for producers, when the income of already employed workers grows due to an increase in the baseline wage.
They have to boost their pricing because of the higher cost of labor, which reduces the purchasing power of customers. It is common for businesses that employ low-wage employees to have competitive gross margins that allow them to absorb increased costs without sacrificing profits.
Rising prices have a direct influence on the less-skilled and less-durable consumer products that they buy. As a result, they would suffer inflation and see their budgets (i.e., real incomes) shrink due to an increase in demand created by the artificially higher wages. This would lead to a decrease in their real incomes.
Then there's the issue of joblessness. As a result, an increase in the minimum wage is often seen as a signal that all other earnings should rise as well. However, if we consider how intertwined markets are, this notion is exposed for the nonsense that it is.
Increasing pay and benefits for employees is a constant strategy employed by businesses to entice workers away from competing employers. Workers' wages are not an absolute measure of their worth, but rather a reflection of their relative worth to the employer as a result of labor's scarcity in relation to the demand from the employer. The employer hopes to compensate the newly hired employee for the increased output he will bring to the company.
The higher the general wage level, the more the employer must bid to engage an additional worker, and the employer must therefore demand more output from the additional worker. As a result, the worker's ability and production are hindered in their quest for a job because of the low minimum wage. Minimum wage increases and lower-skilled workers are more likely to be unemployed as a result of this barrier because of the difficulty in finding work. Thus, it becomes evident that a higher minimum wage makes it more difficult for them to acquire a job, which leads to a greater unemployment rate within that group.
The interventionist program would have a visible effect, but it would also have invisible repercussions that were not immediately apparent. A reduction in investment in regions with naturally high prices would be accompanied by an increase in investment in artificially inflated sectors.
Price signals play an important role in coordinating and allocating resources effectively. An increase in the price of an item that is in short supply encourages customers to save money while urging producers to expand their output.
This effective process, however, is shattered by rising prices caused by an increase in the minimum wage, which forces entrepreneurs to invest in areas where rising prices do not accurately represent market circumstances. This results in them missing out on profit chances since they are mislead into investing in unprofitable sectors.
Genuine demand and scarcity are still there in the marketplace. As a result, the minimum wage sends the wrong message to producers, leading them to make inefficient decisions and misallocating resources.
This means that raising the minimum wage puts people out of work and hurts consumers by diminishing their purchasing power because their real needs aren't being met while the inflated price works as a tax on them. To put it another way, a proposal to double the minimum wage and expect businesses to cut costs is a fantasy that would harm everyone in the economy. We should also keep in mind that the rise in prices now is mostly due to increases in the minimum wage that were not accompanied by increases in the supply of actual commodities.