A higher minimum wage motivates more people to enter the labor force, raising both employment and output. Because poor people spend a relatively large proportion of their income, a higher minimum wage can boost overall economic activity and stimulate economic growth, creating more jobs.
All of these factors vastly complicate the two-dimensional diagram taught in Economics and help explain why a higher minimum wage does not necessarily throw people out of work. The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world.
Even if a higher minimum wage does cause some people to lose their jobs, that cost has to be balanced against the benefit of greater earnings for other low-income workers. Similarly, a recent paper by the economist Arindrajit Dube finds that a 10 percent raise in the minimum wage should reduce the number of families living in poverty by around 2 percent to 3 percent. The economists polled in the Chicago Booth study thought that increasing the minimum wage would be a good idea because its potential impact on employment would be outweighed by the benefits to people who were still able to find jobs.
Raising the minimum wage would also reduce inequality by narrowing the pay gap between low-income and higher-income workers. In short, whether the minimum wage should be increased or eliminated is a complicated question.
The economic research is difficult to parse, and arguments often turn on sophisticated econometric details.
Many leading political figures largely repeat the central theses of economism, claiming that they have only the best interests of the poor at heart. This conviction that the minimum wage hurts the poor is an example of economism in action. Economists have many different opinions on the subject, based on different theories and research studies, but when it comes to public debate, one particular result of one particular model is presented as an unassailable economic theorem.
Politicians advocating for a higher minimum wage, by contrast, tend to avoid economic models altogether, instead arguing in terms of fairness or helping the poor. This happens partly because the competitive market model taught in introductory economics classes is simple, clear, and memorable. But it also happens because there is a large interest group that wants to keep the minimum wage low: businesses that rely heavily on cheap labor.
Another factor is hours of work. If an employer raises its workers' wages but cuts back on their hours—as anecdotal reports suggest some employers have—workers may see little or no benefit on payday. There have also been initiatives in Congress to raise the federal minimum wage.
In subsequent years it would be indexed to keep pace with median wage growth. The bill passed the House in July but was not passed by the Senate.
How would such an increase affect overall employment? So, in the CBO's judgment, raising the minimum wage up to a certain point doesn't result in greater unemployment , but beyond that point, higher wages could mean fewer jobs.
The tricky part, of course, is determining just where that point is. Perhaps not surprisingly, think tanks across the political spectrum have drawn their own conclusions from the CBO report while also disputing some of its estimates. Raising the minimum wage has positive impacts, such as bringing people out of poverty and increasing income for individuals and families.
However, increasing the minimum wage can also lead to increased unemployment, depending on the wage increase, because employers would seek automation as opposed to hiring workers. Determining the right minimum wage increase that benefits larger parts of the population while keeping unemployment static is the key goal. Department of Labor. The Federal Register. UC Berkeley Labor Center. City of Chicago. Illinois Department of Labor.
Congressional Budget Office. Accessed March 26, American Enterprise Institute. Economic Policy Institute. Family Finances. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. Other potential setbacks to wage increases include automation and outsourcing. Compare Accounts.
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Minimum Wage? Microeconomics Minimum Wage by State. Partner Links. Efficiency wages occur when employers pay higher than the minimum to attract skilled workers, boost productivity, and increase loyalty. What Is a Living Wage? Living wage refers to a theoretical wage level that allows an individual to afford adequate shelter, food, and other necessities. What Is a Minimum Wage? The minimum wage is a legally mandated price floor on hourly wages, below which nonexempt workers may not be offered or accept a job.
Positive Economics Positive economics is the study of economics based on objective analysis of what is occurring and what has been occurring in an economy. Wage Expense A wage expense is the cost incurred by companies to pay hourly employees and is a line item that may also include payroll tax expenses and benefits.
What Is a Maximum Wage? A maximum wage is a price ceiling on compensation paid to employees. Investopedia is part of the Dotdash publishing family. Share Tweet LinkedIn Pin. Queens Checkmates Amazon. Posted On : March 19, Posted By :.
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