from Liberty Unyielding
The Democratic leaders in both houses of Virginia’s legislature have just introduced legislation that would raise the Virginia minimum wage from $12 to $15. The bill also retains provisions that make the minimum wage rise with inflation, while preventing it from ever falling due to deflation. As a result, it could rise further in real terms in the future. This minimum wage increase and further increases in the future could lead to a big spike in unemployment in the next recession.
In a deep recession, prices may fall due to deflation, resulting in a dollar of wages being worth more than it was before. If employers can’t adjust wages to match those falling prices, they may have to lay off many more of their employees, because employers cannot afford to pay rising real wages at a time when the demand for their product is shrinking due to the recession. As Jason Lennard noted in the European Review of Economic History, “In the ‘deflationary vortex’ of the 1930s… sticky nominal wages translated to rising real wages, which resulted in mass unemployment.” Moreover, “minimum wage legislation may have contributed to stickiness by preventing nominal wages from falling.”
