Effect of the minimum wage inflation

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Effect of the minimum wage inflation
Wage inflation increases the cost of products. (verifying boss image by Sergii Shalimov from Fotolia.com)

The Fair Labor Standards Act (FLSA), originally enacted in 1939, covers employment policies such as the Family Leave and Medical Act, overtime pay and minimum wage. The FLSA is administered through the United States Department of Labor, who has the power to set and increase the minimum wage. The severity of the effect of minimum wage inflation is tied to the amount of the rate increase and the prevailing economic climate.

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Price Increase

Raising the minimum wage increases the cost of labour in some sectors, particularly the food sectors whose workers, from farm labourers to cashiers, are traditionally paid at minimum wage. This added labour cost must be absorbed by businesses, and many turn to raising prices. According to the 1999 Handbook of Labor Economics, a minimum wage inflation of 10 per cent would raise food prices by four per cent and overall cause a 0.4-per cent increase in the cost of goods.

Health Insurance Coverage

Another option for absorbing minimum wage inflation is to reduce health coverage. A 2005 study performed by Colin Baker at Harvard University indicates that employer-sponsored health insurance falls by 4 per cent when minimum wage is increased by 20 per cent.

Disadvantaged Workers

In some instances, an increase in the minimum wage can make disadvantaged workers less desirable to employers. Youth, and especially minority youth, who do not have the work experience to learn as quickly or have the same productivity as an older employee, are not seen as being valuable enough to pay minimum wage to. People with disabilities who have lower productivity rates may also be cut or not hired because of minimum wage inflation.

Fluctuating Value of Minimum Wage

While the actual dollar amount of the minimum wage has increased since being put into effect in 1939, the value of the minimum wage in comparison to the cost of goods has fluctuated greatly. For people trying to make a living on a minimum wage paycheck, such variations can be problematic. The actual wage stays relatively standard yet the standard of living achieved by minimum wage changes. From the employer standpoint, the large hikes on the minimum wage that must be suddenly made to adjust to inflation can increase labour cost dramatically.

Indexed Minimum Wage

Increasing the minimum wage at a set rate annually is known as indexing the minimum wage. Florida, Washington, Oregon and Vermont have instituted policies to index the minimum wage. There have been no measured results of inflation in Washington and Oregon, who have supported indexing the minimum wage for the longest.

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