One of the most pernicious aspects of Assembly Speaker Sheldon Silver’s proposal to hike the minimum wage is his bid to index the future minimum wage to inflation “to ensure that the real value of New York’s minimum wage does not erode as the cost of living rises.”
Beginning in 2014, the state would automatically hike the new $8.50 minimum wage “each year … according to the Consumer Price Index.”
It’s noble to want workers’ pay to keep up with inflation. But this provision would kill 
employers’ flexibility just when they need it most: during a period of high inflation that cuts into their profit margins.
Think about it: when inflation goes up, businesses must pay more for the raw materials that go into the stuff that they sell.
But oftentimes, they cannot pass higher costs to consumers. Consumers, also suffering an erosion of their income because of the same inflation, would respond to price hikes by cutting their purchases.
To avoid this, many companies accept the lower profit margins for as long as they can do so.
But it becomes more difficult for employers to pursue this strategy if they must confront rising labor costs at the same time. Under Silver’s proposal, retailers and other particularly inflation-sensitive business owners would face just that.
Under a five percent inflation scenario over two years, for example, the minimum wage would go from $8.50 to $9.37. Hourly workers who earned more than the minimum would have to get similar raises, too, so as not to harm morale.
What would companies do? Because they couldn’t cut labor costs — or at least keep costs steady — per hour, they would have to cut workers.
That’s exactly what you don’t want in an environment of high inflation, which often comes along with high unemployment, anyway.
Even worse, only New York employers would face this situation. One remedy would be for them to move out of state.
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