We are sadly too busy to really post anything at the moment.
As a result, to fill in time we will put up a recent discussion between TVHE writers. The one thing this conversation shows: we all agree that arbitrary policies that are introduced to indirectly target a problem (eg changing the minimum wage to target inflation) tend to do more harm than good.
Am I missing something? Cost push anyone?
Increasing the minimum wage is a one off increase in the wages for one part of the labour market right, and it would reduce employment, which would reduce “demand”, which would reduce growth in prices (which is inflation).
Any increase in inflation would have to come from inflation expectations – where the increase in cost passes into prices and then the higher price level is “confused” for inflation.
As a result, if we can say that an increase in the minimum wage will:
- Be in industries where demand for the product is relatively elastic so the change in price is minimal,
- Be in industries where demand for labour is relatively elastic so that employment falls reducing demand
Then we can say a higher minimum wage will reduce inflationary pressures.
Of course, this seems like a fairly suboptimal way to reduce inflationary pressures – as when demand is elastic (as it would be in the labour and goods markets here) the direct welfare cost of the minimum wage is very high …
how likely is it that the set of circumstances you outline will eventuate? It seems quite far fetched to think that it will hold across all industries that heavily utilise minimum wage labour.
Well then there is a trade-off – its impact on inflationary pressure vs its impact on economic efficiency and direct impact on welfare.
I’m suggesting that the trade-off might not even exist: it may hurt efficiency and thereby exacerbate the inflation problem.
However, they only way I can think of really getting that result is:
- Using a capacity model of inflation,
- Saying that the corresponding lift in the price level for a negative supply shock will feed into inflation expectations.
Although this will limit the inflation vs efficiency trade-off I’m not sure it will make it reverse direction, although it could.