What are the advantages and disadvantages of having minimum wage automatically adjusted for inflation?

Question

I have heard some people advocate that minimum wage should be automatically adjusted for inflation, reindexed on a yearly basis. For instance, if the minimum wage is $10/hr and inflation is at 5% that year, then next year the minimum wage should automatically be increased to $10.50/hr.

What would be the advantages and disadvantages of tying minimum wage to inflation?

Note that other answers on this site indicate that there is debate over whether an increase in minimum wage causes inflation, so answers should not assume one outcome or the other.

Answer 1

Advantages

1. Any negative impacts (whatever they may be) of the minimum wage are limited by the inflation rate. I.e. it is only increasing by the rate of inflation.

2. It increases automatically, not waiting on legislative action.

3. It increases often, so negative effects are spread out.

Disadvantages

1. It increases often, so negative effects (whatever they may be) are happening constantly.

2. It increases automatically, even if there is reason to believe that now is a bad time (e.g. recession).

3. It never increases by much, so any positive effects are limited.

Possible negative effects

This is generally controversial and contested.

1. Increased unemployment. Contested and counter-contested.
2. Inflation. Contested.
3. May make it hard for low wage employers to differentiate themselves from other low wage employers, increasing employee turnover. Probably contested. Matters because higher turnover increases employee training costs. Also, employers may not bother issuing raises if they know that mandated increases are coming.

4. Students dropping out of school. May be contested. Probably not much impact here, since real (inflation-adjusted) wages are staying steady rather than increasing. Only nominal wages increase.

   The basic idea here is that a large minimum wage increase may cause some students to view working for the new wage as superior to going to school. Since people with more education are generally better off, this is considered a negative effect.

Possible positive effects

1. Higher nominal wages for some people. Pretty much uncontested, although this benefit may be outweighed by negative effects (contested).
2. Network effects. People with higher wages may then spend those higher wages. This could cause either inflation or productivity/employment increases. Highly contested as to which.

Answer 2

A fixed wage floor subject to inflation is a temporary remedy that gradually evaporates. For opponents of a minimum wage, the absence of automatic adjustment in inflationary times is a de facto slow-motion repeal. Opponents would most prefer no minimum wage at all, but failing that would much prefer a fixed evaporating minimum wage to a permanent one.

As for the rest, the advantages and disadvantages of an automatically adjusted minimum resolve around two things:

• Inflation itself. Employers who buy and sell things cope with inflation constantly, and adjust their purchasing choices and prices accordingly. Labor is in this sense just another purchased widget needed to do business, and shouldn't be that different from various other widgets.

• Feasibility of initial minimum wage. If a 2018 automatically adjusted minimum wage was initially set to $1,000,000/hour, that either would ruin all, (or most), employers, or create a huge black market. If a 2018 automatically adjusted minimum wage was initially set to $5/hour it would be much the same as no minimum at all. Somewhere in between there's a sweet spot, which might be a matter of experimental trial-and-error, and perhaps might also require adding some additional variable to the adjustment formula.

For experimental testing purposes, (i.e. properly measuring the results of a longstanding minimum wage), an automatic adjustment is preferable, as it would eliminate the variable of deflation. For example, supposing a too low deflated minimum correlated with working family malnutrition, an opponent might wrongly infer that it was the existence of any minimum at all which led to malnutrition, rather than a ruinously low wage. Similarly, an unfeasibly high wage floor might eventually deflate to an actual sweet spot with some positive results, which an advocate might wrongly infer proved the unfeasible wage was in fact the optimum minimum wage.

Answer 3

Growth in wages often doesn't closely match inflation. In the public sector there are other pressures related to the economy, government revenues, policy, etc. Even in the private sector it depends on availability of staff, price of raw materials, and scope for consumer price rises. But overall, in a well functioning economy with increasing productivity, wages generally increase more than inflation.

So if minimum wage increases relative to inflation, it will eventually fall behind other wages, increasing wage gaps and relative poverty. In times of stagflation where inflation rises but the economy contracts, it will pose a real problem for business and governments unable to implement pay freezes and facing mounting costs. On the other hand, classical economics associates inflation with economic growth, and then automatic minimum wage rises will be affordable.

It also stops governments raising minimum wage for political popularity (ignoring affordability), or conversely freezing it to finance tax cuts for the rich.

Answer 4

Simply put this would cause spiraling inflation. Businesses trying to get ahead of the ever trending upwards spiral will boost their prices ahead of the cost of living increases. As time passes those on a fixed income, living on savings or a fixed annuity will go into poverty. Beyond that as wages increase and product costs increase, Spanish products will become uncompetitive with other similar products on the world market. Eventually Spanish businesses fail and fire their workers. There is the strong possibility that large corporations may move out of Spain to seek labor that does not constantly have rising labor costs. This would likely begin when that wage law is passed and cause mass unemployment.