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Raising the Minimum Wage for Working Men and Women in California and the Rest of America

Another Minimum-Wage Fallacy

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Proponents of increasing the minimum wage hold two contradictory views on the subject. First, they say that increasing the minimum wage will increase the size of the economy. President Obama recently claimed that increasing the minimum wage from $7.25 per hour to $10.10 per hour would increase GDP by $32.6 billion and would create 140,000 jobs. According to Macroeconomics 101, leaving aside its effects on employment, an increase in wages will increase consumption, which will increase GDP.

The second claim is that increasing the minimum wage will have no effect on inflation. Jeannette Wicks-Lim, an economist with UMass Amherst, for example,argues, “The potential impact of minimum wage hikes on the overall price level is simply too small to have any appreciable impact on inflation.” Basic economics says that these two claims cannot both be true.

According to Keynesian economics, increasing aggregate demand will boost both inflation and the economy. If increasing the minimum wage can create 140,000 new jobs, then basic economics stipulates that it can also result in higher prices.

• Category: National • Tags: Noah Glyn