Economists at BofA Merrill Lynch say one of the questions clients have been asking recently is whether proposals to raise the minimum wage in the United States — like the one highlighted by President Obama during his annual State of the Union address in January — would have an inflationary impact.
The answer, they say, is no, given the the tiny slice of the workforce such a policy would affect.
“For the sake of argument, let’s assume that the minimum wage does increase from the current $US7.25/hour to the proposed $US10.10/hour,” write the economists in a note to clients.
“That is a $US2.85/hour increase, or 39%! Surely that has to be inflationary? Not necessarily. As a rough approximation, $US2.85 on a $US24 average hourly wage is nearly a 12% gain. But with just 2.8% of wages subject to the minimum, the overall impact is a 0.33% increase in average hourly earnings. This is very unlikely to be noticeable at all in the wage, let alone the inflation, data.”
Of course, there is still the question of how many workers make more than the current $US7.25/hour but less than the proposed $US10.10/hour minimum wage, as they would benefit from the increase as well.
According to the BofAML economists, this is not a particularly large group either.
“We do not know the share of individuals (or wages) who are just above the minimum wage and whose wages might also rise with an increase, but we do know that it is likely still a small proportion,” they write.
“The current minimum wage is well below the economy-wide average. Even for low-paying sectors like retail trade and leisure and hospitality — where the average hourly wage in 2013 was $US13.50 and $US16.60, respectively — the current minimum is a fair bit lower. These data also suggest a relatively small share of total wage income that would be directly impacted by any increase in the federal (or various state) minimums.”
So while the minimum wage debate may be a hot-button political issue, it is somewhat irrelevant from an economic perspective.