Does raising the minimum wage increase inflation?

There are conflicting views on whether raising the minimum wage increases inflation. Tied to this is the question of what effect a higher minimum wage has on employment because historically, high unemployment goes hand-in-hand with high inflation. While raising the minimum wage would help stimulate the economy due to the increased spending power of workers receiving higher wages, a former CEO of one of the biggest employers in the United States explained that too high of a government-mandated minimum wage would have a deadly effect on employment.

According to Ed Rensi, formerly of McDonald’s, a higher minimum wage would not only kill existing jobs but also result in closing a substantial number of small businesses, from 15% to 20%. In theory, raising the minimum wage forces business owners to raise the prices of their goods or services, thereby spurring inflation. In actual practice, however, it is not so simple since wages are only one part of the cost of a product or service paid for by consumers. A higher minimum wage can be offset by heightened productivity by workers or trimming down a company’s manpower.

In 2014, fast-food workers in the United States started asking for a minimum wage of $15 an hour, or almost double what they were earning. If their demand is granted, a typical burger flipper or order taker at McDonald’s would end up earning more than $30,000 per year.

Suffice it to say, raising the minimum wage to an excessively high rate would exert inflationary pressure on the economy, but increasing it to keep pace with inflation would only have a minimal effect. (For related reading, see: The Minimum Wage: Does It Matter?)