While the national debate regarding the $15.00 an hour minimum wage debate rages on, there is a case to be made for managing the minimum wage in the same way the Federal Reserve adjusts interest rates. What I mean by that is, the Fed adjust their interest rates to a target unemployment rate and a target inflation growth. The minimum wage is also a delicate instrument of our socioeconomic mechanism that requires careful and deliberate manipulation. Raising it with standard broad stroke can do a lot more damage than the problem it was meant to fix.
While more complex than the basics I’m about to explain, the Fed adjust interest rates based on unemployment and inflation. When there is low unemployment, there is bound to be more money flowing through our economy. This creates inflation, which in turn, devalues our currency. By raising interest rates, the Fed makes it harder to access money through borrowing, which in turn slows the economy, but prevents inflation from getting out of control. Our policy makers can do something similar in the way they raise minimum wage. By raising minimum wage to $15.00 an hour, it can create inflation by artificially increasing the cash flow in the economy. It can also cause unemployment because business owners may either have to close down, or fire more employees in order to keep up with the minimum wage. While larger cities may be able to keep up with the increase, smaller municipalities may find it increasingly difficult to keep up with the increasing wage. We do see this in certain states that have raised the minimum wage in line with what can be acceptable. For example; Maryland Oregon have different minimum wages depending on the cost of living and population density. What policy makers need to do is raise the minimum wage based on what the broader socioeconomic environment can withstand.
Understanding that the nation does face problems with regard to income inequality is the first step to making sure that our nation’s employers pay a living wage. But a lot of the movements who are demanding the raises don’t seem to fully understand the implications of what they are asking for. By carefully evaluating the economics of unemployment and inflation, assessing minimum wage increases can be done in a more judicious and prudent manner.