Why Higher Wages Didn't Increase Inflation

Explaining how a rise in wages has historically not increased consumer prices, plus a brief lesson on inflation and its connection to global trade disruptions.

Jan 21, 2025

Over the last few years, economists and business leaders have debated the causes of the 2021-2023 era of inflation. Some argue it was excessive government spending, while others blame corporate price gouging. However, there is one argument that I can objectively tell you is not the cause of inflation: raising the minimum wage.

I’ve actually worked with both wage and inflation data quite extensively over the last few years, both in the classroom and in a professional setting. The argument is that, because business owners have to pay their employees higher wages, they will pass on the higher labor costs to consumers. In theory, this may seem to make sense. Yet, when we examine the actual data from the U.S. Department of Labor, we can come to the conclusion that this is not the case. Before we get into the details, I will explain some basic economic definitions first.

What “inflation” actually means

Chances are, you have probably heard the term “inflation” thrown around a lot over the last few years without a good definition. What is inflation? According to the U.S. Department of Labor, “Inflation can be defined as the overall general upward price movement of goods and services in an economy.“1 When you hear the word inflation, think the rate of increase in prices. For example, if you heard that inflation increased by 3% over the last month, what this means is that the general price of goods you purchase everyday has increased by 3% since last year.

I’ll try to give you a more direct example. If you had to pay $1.50 for a cup of coffee in June of last year, but found yourself paying for $1.55 for the very same cup of coffee in June of this year, this means the price of this particular cup of coffee increased by roughly 3.3% (the percentage difference between $1.50 and $1.55). Hence, the price of this coffee “inflated” by about 3.3% from one year to the next.

How is inflation measured?

There are different forms for how inflation is measured in the market. However, the most common measurement used is the Consumer Price Index (CPI), an economic index tracked by the U.S. Bureau of Labor Statistics. The official BLS website defines the CPI as “a measure of the average change over time in the prices paid by consumers for a representative basket of consumer goods and services.“2 The phrase “basket of consumer goods and services” is essentially a collection of items you likely pay for everyday, including cereal, soda, eggs, or even a trip on the bus. All of these items you purchase are put together and measured by field economists, who compare how much the price of these goods were a year ago to how much they cost now. Field economists actually go into supermarkets across the country and collect price data directly. Once this data is all put together, they determine the aggregated increases associated with all of these goods, to see how much prices generally increased across different items on average. There are other indicators that measure inflation, but the CPI is considered the gold standard.

Understanding the Minimum Wage

The minimum wage is the minimum amount employers must pay their workers, of course. In the United States, the federal minimum wage has remained at a steady $7.25 per hour. However, if you’re from a state like New York or New Jersey, you know the minimum wage is far higher where you live. Below you can find a map denoting the minimum wage by each state:

So, if you live up in the Northeast, chances are your state’s minimum wage is at least $14-15 (excluding Pennsylvania and New Hampshire, which remain at the federal level of $7.25). You may also notice that certain regions of the country remain especially committed to $7.25, particularly in the South, parts of the Midwest, and the Mountain Plains. The West Coast and Southwest region (barring Texas) have seen some increases in their state minimum wages as well.

Of course, certain parts of the country are more expensive than others. A $250,000 salary in Tennessee gives you a greater bang for your buck than it would in New York. Hence, New York has a higher minimum wage compared to most of the country. Though, as a native New Yorker, I would argue $15.50 isn’t enough to live off of either.

“It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By ‘business’ I mean the whole of commerce as well as the whole of industry; by workers I mean all workers, the white collar class as well as the men in overalls; and by living wages I mean more than a bare subsistence level-I mean the wages of decent living.”

-President Franklin D. Roosevelt

According to Drexel University, the minimum wage was originally created “to protect workers (specifically lower level workers with less bargaining power), create a minimum standard of living, and stabilize the economy following the Great Depression.”3 This was also President Franklin D. Roosevelt’s vision when he oversaw the initial implementation of the federal minimum wage into law, as quoted above. The “minimum standard of living” part is very important. Take a minute and think if $15.50 an hour in New York City satisfies any standard of living. I don’t think it does. I would argue even cracking $100,000 per year is barely enough in the city. Of course, there are other measures we can take to make towns more affordable beyond just raising wages. We can work to reduce excessively high prices, granting individuals more purchasing power (see my article regarding why rent is so high in the New York Metro Area). However, raising the minimum wage to keep up with increased prices is a sound way to ensure economic stability.

Some would argue people can just better themselves with education and that low-wage jobs are meant for the likes of high school students. The truth is, if we go based off of the definition Drexel University provided to us, then the minimum wage should meet the basic standard of living for all jobs. That would benefit everybody, as increasing the minimum wage for retail and fast food employees would lead to increased wages for construction workers and nurses, creating an upward ripple effect. In other words, I mean everyone from the cashier at McDonald’s to the entry level accountant at KPMG could see their earnings increase, as raising the minimum wage would force companies to more evenly distribute the profits they generate, while still granting a beyond comfortable life for executives in leadership. In my view, everyone is being underpaid for their labor, blue collar or white collar.

This assessment is supported by research completed by The Washington Center for Equitable Growth, which states that:

“After a minimum wage increase, the lowest paying firms raise their wage to the new minimum. This leads the next rungs of higher-paying firms to raise wages as well—to increase their ability to recruit and retain workers who would have better options elsewhere due to the minimum wage increase.”4

In other words, as those making minimum wage earn more, this will force firms to start paying employees up and down the ladder more as they seek to remain competitive in attracting talent from the labor market.

Wouldn’t this lead to higher inflation?

You are probably thinking that if everyone started making more money, that would lead to more demand as consumers would have more purchasing power and thus cause higher prices. Firstly, the minimum wage is generally increased in yearly increments. At least, it was federally prior to its static $7.25 rate since 2009. In 1990, the federal minimum wage was increased from $3.35 to $3.80, then increased to $4.25 in 1991, then $4.75 in 1996, and finally to $5.15 in 1997.5 That’s a whopping 53.7% increase between 1990 and 1997! However, did prices spike during this period? Take a look at the graph measuring the Consumer Price Index annual percentage increase from the prior year, between 1989 to 1997:

Source: https://fred.stlouisfed.org/series/CPIAUCSL#

Notice, the CPI yearly percentage increase remained rather steady or actually slowed down during the very same period where the federal minimum wage increased by 53.7%. Keep in mind, the CPI measures the rate of increase and not just the increase, so prices were still rising during this period (which is healthy for the economy so long as it does so in the 2-3% range, which it did throughout this decade). The only way to achieve literal reduced prices would be a financial recession, similar to the 2008 crisis.

In fact, this same observation can be found in New York City, where the minimum wage has increased at a faster rate compared to the nation. The minimum wage in New York City increased from $7.25 to $15.00 for large employers and fast food establishments between 2013 and 2019, which can grant us a pre-pandemic measure.6 Note that smaller employers were still at a $13.50 rate as of 2019:

Source: https://comptroller.nyc.gov/reports/spotlight-minimum-wage/

Now let’s take a look at the Consumer Price Index measured in the New York City Metropolitan Area from 2013 to 2019, officially known as the New York-Newark-Jersey City Statistical Area. This region compromises New York City and its surrounding counties in Long Island, the lower Hudson Valley, New Jersey and even a county in Northeastern Pennsylvania (Pike County):

Source: https://fred.stlouisfed.org/series/CUURA101SA0#

Notice that the New York City Area CPI remained roughly around 2% despite the city’s minimum wage increasing. You can see that after 2020, prices start to shift up, marking the beginning of the post-pandemic inflation surge. However, this was an international event that did not stem from increased wages in New York City.

If not wages, then what caused inflation?

You’ve probably heard a lot of different causes as to what caused higher prices. Well, think about what happened right before inflation started to really surge. The Coronavirus forced our economy to come to a sudden, unexpected halt. This was not just our economy, but virtually every major economy across the world. Now, what is something you know about a lot of the goods you purchase in the United States? A great deal are foreign produced goods, with a substantial amount being produced in countries with cheaper labor such as the developing economies in Asia.

Take your iPhone for example. Apple, although a California based company, outsources the manufacturing of their smartphones to countries mostly concentrated in Asia. This includes China, Taiwan, Thailand, Vietnam, Philippines, Malaysia and Indonesia.7 China can especially highlight the supply chain disruptions triggered by Covid-19, as the country was far more restrictive in reopening its economic zones compared to the United States. These restrictions were still prominent as recent as late 2022, when Chinese officials imposed lockdown measures for the Zhengzhou Airport Economy Zone, a manufacturing hub that included an Apple associated Foxconn plant. As of 2022, the Zhengzhou based plant employed about 200,000 people, marking a major setback for iPhone production.8 This meant that, while the United States economy had mostly reopened by 2022, other countries where a lot of goods are produced were still facing lockdowns.

Now, think about all of the other goods that depend on smoothly run global trade. Chances are most of your experiences with inflation were at the grocery store. You were probably at self-checkout scanning items, seeing the bill rapidly grow higher as you stood there frustrated. The supply chain’s impact on food prices post-pandemic were quite significant. According to one Federal Trade Commission report, “Producers, wholesalers, and retailers… reported major disruptions throughout the entire grocery supply chain shortly after the outbreak of the COVID-19 pandemic.”9 This negative impact on the supply chain was further compounded by changing consumer behavior, which shifted from eating out at restaurants to purchasing more food at home during and after the height of Covid-19.

Think about it. Disruptions to the amount of food that can be supplied to grocery stores in addition to increased demand for meals at home would naturally lead to higher prices. It is simple supply and demand at work.

Next time you see an article about inflation and see comments blaming minimum wage workers getting a modest boost, remember what was discussed in this article. Do you really think the cashier making a few extra dollars working at McDonald’s caused your prices to surge? Or was it the unexpected, increased supply chain issues that impacted global trade? If you consider the data analyzed above, the answer starts to make sense that it is actually the latter.

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