There is an unrelenting myth that if we raise the minimum wage it will cause the inflation rate to rise. This is pure bullshit and needs to be debunked. To keep this from not getting too long, this will mostly focus on 1980’s-present.
The theory is that if the minimum wage rises, it will cause inflation. It says that corporations will raise prices in order to recuperate their profits that were lost from the increase of the cost of production, in this case, the increase of the minimum wage. Because employers will have to spend more money on their employees, they will just increase the prices to make it up. It makes sense in theory but that’s not how it works in reality.
In 1980 the minimum wage was increased; it went from $2.90 to $3.10. From 1979 to 1980, before the increase, inflation rose 2%, from 11% to 13%. After it was increased, 1980–1981, the inflation rate decreased from 13% to 10%.
In 1981 the minimum wage was increased to $3.35. We know that in 1980–1981, the inflation rate went down by 3% to 10%. After they increased the minimum wage again the next year, between 1981–1982, the inflation rate went down more, from 10% to 6%.
The next time the minimum wage rose was in 1990 and 1991. In 1989, the inflation rate was 4.8%, and rose to 5.4% in 1990. From 1990 to 1991, the minimum wage went up from $3.35 to $3.80 but the inflation rate decreased by 1.2% to 4.2%. The next year, in 1991, the minimum wage rose to $4.25 and again, the inflation rate did not increase. It went down to 3.0% in 1992.
So now you have several minimum wage increases in a row that did not cause the inflation rate to increase over the course of an entire decade. None of the minimum wage increases —in 1980, 1981, 1990, and 1991 — resulted in an increase of the yearly inflation rate. In fact, every single time there was a minimum wage increase, there was actually a correlation (I’m not saying a causation) with a decrease in the annual inflation rate.
The next two times the minimum wage was increased, was in 1996 and 1997. Between 1995–1996, the inflation rate rose to by 0.2% to 3.0%. After the first minimum wage increase to $4.75, inflation, yet again decreased. It went down 0.7% to 2.3%. In 1997, the minimum wage rose again to $5.15 and the inflation rate… decreased! Oh who could’ve seen that coming! The inflation rate went down from by 0.6% from 2.3% in 1997 to 1.6% in 1998.
Now you have the last three minimum wage increases; 2007, 2008 & 2009. In 2006, the inflation rate was 3.2%. Between 2007 and 2008 when the minimum wage was raised to $5.85, the inflation rate went up from 2.8% to 3.8%. But once it was raised to $6.55 in 2008, the inflation rate decreased by 4.2%. And for the last minimum wage hike to $7.25, inflation rose 2%. For only two times in recent history since the 1980’s has the inflation rising corresponded with a minimum wage increase. It is important to remember, however, that during this time we had a global food crisis and the financial crisis; inflation was going to rise regardless of whether or not the minimum wage had been increased. So even though the minimum wage increase corresponded with an inflation increase twice, it does not mean that raising the minimum wage triggered an automatic inflation increase.
Only 22% of the time (twice) has an increase of the minimum wage corresponded with an increase to the inflation rate. On the other hand, 78% of time that there was a minimum wage increase since 1980, there hasn’t been an increase to the annual inflation rate. If raising the minimum wage was going to cause inflation, it would’ve increased — but it didn’t, and doesn’t. It’s a historical reality that can be proven when you look at the the minimum wage increases versus historical inflation rates.