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Clinton minimum wage increase repealed

March 23, 2005

Tags Money and BanksValue and Exchange

When pro-inflation economists try to argue that inflation does not merely have redistributive effects, but can actually increase total production one of their most frequently used arguments (Often stated in implicit rather than explicit terms ) is that inflation can help erode the real value of artificially increased minimum wages set either directly by governments or indirectly by unions. Since minimum wages will destroy job opportunities for low-skilled workers, eroding it through inflation will help increase employment and production. The problem with this argument is however that this benefit is only likely to be short-term since politicians and union bosses is likely to notice the falling purchasing power of the minimum wages they have set and compensate it by increasing it in nominal terms.

In this context we can see now how the entire Clinton minimum wage increase in 1996-97 have been repealed through inflation. Between September 1996 (The last month when the old $4.25 minimum wage was in place)and February 2005, the consumer price index rose by 21.55% (191.8/157.8). This means that the current $5.15 minimum wage is $4.24 in September 1996-dollars. The minimum wage is thus lower in real terms now than it ever was before the Clinton increase. And of course, if the consumer price index underestimates inflation, which many of us believes it do, then the current minimum wage is even lower in a historical perspective.

However, we can also see now that the politicians have indeed noted the declining real value of the minimum wage and from what I understand there are two separate bills in the Senate to raise it. One is by Republican Senator Rick Santorum who wants to raise it by $1.10 to $6.25 which would basically restore it to the level it had in September 1997, when the increase to $5.15 was first implemented. Not surprisingly, Ted Kennedy wants to raise it even more ,by $2.10 to $7.25. Most likely the end result will be some kind of a compromise, that is a minimum wage somewhere between $6.25 and $7.25.

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