Why is it necessary to consider inflation when evaluating the adequacy of the current minimum wage?

• A. Because inflation increases the nominal value of the minimum wage automatically.
• B. Because inflation only affects luxury goods, not basic wages.
• C. Because inflation reduces the purchasing power of money, so the real value of the minimum wage may decline over time.
• D. Because inflation makes the minimum wage irrelevant to economic policy.

Answer: (C)

Verified step by step guidance

1. Understand the difference between nominal wage and real wage. The nominal wage is the wage expressed in current money terms, while the real wage adjusts for changes in the price level (inflation) to reflect the actual purchasing power.
2. Recognize that inflation causes the general price level of goods and services to rise over time, which means that the same amount of money buys fewer goods and services than before.
3. Evaluate how inflation affects the minimum wage by comparing the nominal minimum wage to the inflation rate. If the nominal minimum wage does not increase at least as fast as inflation, the real minimum wage (purchasing power) decreases.
4. Use the formula for real wage to quantify this effect: \(\text{Real Wage} = \frac{\text{Nominal Wage}}{\text{Price Level}}\). As the price level increases due to inflation, the real wage falls if the nominal wage remains constant.
5. Conclude that considering inflation is necessary to assess whether the minimum wage maintains its adequacy in providing workers with sufficient purchasing power over time.