Question

do you think the U.S. government should increase the minimum wage every year to match inflation? (your answer should be at least one paragraph)

Answer 1

Higher wages boost sales which are likely to result in higher consumer spending. A substantial increase in the minimum wages could lead to increased growth. For two reasons, it could also contribute to inflation

Lower prices to businesses

Higher employee spending.

The minimum wage, however, is only one factor influencing growth and inflation.

If employees earn an raise in pay then consumer spending will grow. Workers with low wages are likely to have a higher median tendency to consume (i.e. they invest a high percentage of extra pay). This could also have a multiplier effect, with higher spending causing knock-on effects to other parts of the economy; this should help boost economic growth.

If we assume, however, that labor markets are competitive and assume that a minimum wage causes lower employment, then rising unemployment will have a negative impact on aggregate demand. People who get unemployed would spend less, which would lead to lower aggregate demand.

From the company's perspective an increase in the minimum wage would increase their production costs. Not only do companies have to increase employees ' salaries on the minimum wage, but if they want to preserve salary differentials – they will need to raise the pay of more professional workers – they earn only above the minimum wage.