How does minimum wage affect inflation and small businesses?

Monongalia and Preston

MORGANTOWN, W.Va. – A bill to raise the federal minimum wage to $15 per hour was passed in the U.S. House of Representatives and is now being discussed in the Senate. While political analysts have said that the bill probably won’t be passed this year, it’s likely an issue that Congress will continue to face in the upcoming years.

The Raise the Wage Act being discussed by U.S. Senators right now would gradually raise the federal minimum wage to $15 per hour by 2025, and the federal minimum wage is currently at $7.25 per hour. The last time the wage was raised was in 2009.

Each year that the minimum wage law isn’t updated, the value of that wage drops due to inflation, so the minimum wage must be constantly updated in order for low-skilled workers to be earning a consistent amount.

Credit: Shayla Klein

But where does this inflation come from? One of the larger arguments against minimum wage is that it causes inflation. And that’s true to a degree–one strategy businesses might use when minimum wage laws are introduced is to push the difference in cost of labor over to consumers–but inflation is more complex than that.

“It can lead to a short-run jump in the overall price level in the economy when the minimum wage is increased, although it’s not going to lead to a sustained inflation,” said John Deskins, Director of the Bureau of Business and Economics Research at West Virginia University.

Credit: Shayla Klein

Inflation can rise when the country prints more money, when there’s more national debt, when there’s any other change in the price of the production of goods (for example, tariffs), or when people have more money to spend and are willing to pay a higher price.

Some states have recently tried to solve the issue of sustaining the value of the minimum wage by creating a law that requires an annual review of the wage in correlation with the Consumer Price Index–a measurement of inflation.

But in theory, a state that offers a competitive minimum wage could draw in more business. If a state has a lower minimum wage than the surrounding states, it could draw in businesses because the cost of labor would be low.

Credit: Shayla Klein

Having a higher minimum wage has other benefits. The Congressional Budget Office estimates that the Raise the Wage Act would lift 1.3 million people out of poverty. And for a state like West Virginia, where the cost of living is generally lower than the national average, a minimum wage boost at this size could be substantial. On the other hand, a raise in wages at that size would be hard on small businesses.

“The biggest thing is, with small businesses now and the internet and people being able to purchase stuff everywhere, business is already in dire straights, so the profit line is not like it used to be,” said Emily Sanders, Owner of the Exotic Jungle Pet Superstore in Morgantown, “So that would absolutely hurt my business and small businesses, and it’s certainly not that my employees, who are outstanding, deserve it, but the business just doesn’t make enough profit to afford that.”

If the minimum wage was increased to the point where a business couldn’t handle it, they might increase prices, lay off workers or give workers less hours, or close the business altogether. Still, almost half of U.S. states rely on the federal minimum wage when prices are 17 percent higher than they were when the last federal minimum wage law was passed.

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