Economic effects[edit]
— Henry Ford, 1926[104][105]
The economic effects of raising the minimum wage are unclear. Adjusting the minimum wage may affect current and future levels of employment, prices of goods and services, economic growth, income inequality, and poverty. The interconnection of price levels, central bank policy, wage agreements, and total aggregate demand creates a situation in which conclusions drawn from macroeconomic analysis are highly influenced by the underlying assumptions of the interpreter.[106]
Employment[edit]
In neoclassical economics, the law of demand states that—all else being equal—raising the price of any particular good or service reduces the quantity demanded.[107] Therefore, neoclassical economists argue that—all else being equal—raising the minimum wage will have adverse effects on employment. Conceptually, if an employer does not believe a worker generates value equal to or in excess of the minimum wage, they do not hire or retain that worker.[108]
Other economists of different schools of thought argue that a limited increase in the minimum wage does not affect or increases the number of jobs available. Economist David Cooper for instance estimates that a higher minimum wage would support the creation of at least 85,000 new jobs in the United States.[109] This divergence of thought began with empirical work on fast food workers in the 1990s which challenged the neoclassical model. In 1994, economists David Card and Alan Krueger studied employment trends among 410 restaurants in New Jersey and eastern Pennsylvania following New Jersey's minimum wage hike (from $4.25 to $5.05) in April 1992. They found "no indication that the rise in the minimum wage reduced employment."[110] In contrast, a 1995 analysis of the evidence by David Neumark found that the increase in New Jersey's minimum wage resulted in a 4.6% decrease in employment. Neumark's study relied on payroll records from a sample of large fast-food restaurant chains, whereas the Card-Krueger study relied on business surveys.[111]
A literature review conducted by David Neumark and William Wascher in 2007 (which surveyed 101 studies related to the employment effects of minimum wages) found that about two-thirds of peer-reviewed economic research showed a positive correlation between minimum wage hikes and increased unemployment—especially for young and unskilled workers. Neumark's review further found that, when looking at only the most credible research, 85% of studies showed a positive correlation between minimum wage hikes and increased unemployment.[112]
Statistical meta-analysis conducted by Tom Stanley in 2005 in contrast found that there is evidence of publication bias in minimum wage literature, and that correction of this bias shows no relationship between the minimum wage and unemployment.[113] In 2008 Hristos Doucouliagos and Tom Stanley conducted a similar meta-analysis of 64 U.S. studies on disemployment effects and concluded that Card and Krueger's initial claim of publication bias was correct. Moreover, they concluded, "Once this publication selection is corrected, little or no evidence of a negative association between minimum wages and employment remains."[114]
The Congressional Budget Office (CBO) in 2014 estimated the theoretical effects of a federal minimum wage increase under two scenarios: an increase to $9.00 and an increase to $10.10. According to the report, approximately 100,000 jobs would be lost under the $9.00 option, whereas 500,000 jobs would be lost under the $10.10 option (with a wide range of possible outcomes).[116] The Center for Economic and Policy Research (CEPR) in contrast in 2013 found in a review of multiple studies since 2000 that there was "little or no employment response to modest increases in the minimum wage."[117] CEPR found in a later study that job creation within the United States is faster within states that raised their minimum wage.[118] In 2014 the state with the highest minimum wage in the nation, Washington, exceeded the national average for job growth in the United States.[119] Washington had a job growth rate 0.3% faster than the national average job growth rate.[109]
The CBO in 2019 estimated the theoretical effects of a federal minimum wage increase under three scenarios: increases per hour to $10, $12 and $15 by 2025. Under the $15 scenario, in 2025 up to 27 million workers could see increases to their average weekly earnings while 3.7 million workers could lose employment. The latter statistic, in CBO's estimation would rise over time in any wage increase scenario as capital allocation replaces some workers. Wage increases would be heavily skewed (40%) towards those already earning above the minimum wage with more than 80% of benefits accruing to more educated workers living above the poverty line (Table 5). The number of persons in poverty would be reduced by 1.3 million (assuming no tax implications from increased income). The CBO notes that it does not consider the inflationary effects of these policies when estimating the change in poverty level as these estimates, while increasing inflation, are uncertain. Additionally, the CBO assumed that the weight of benefits would accrue to those below the poverty level based on historical wage increase levels. They noted that data on the minimum wage tends to assume the opposite (that benefits accrue to those above the poverty level), but that that data was not definitive enough to allow for estimation in their work. Some aspects of the CBO study are summarized in the table below.[120]
| Policy | $10 | $12 | $15 |
|---|---|---|---|
| Workers below new Minimum Wage that could see wage increase (millions) | 1.5 | 5 | 17 |
| Workers above new Minimum Wage that could see wage increase (millions) | 2 | 6 | 10 |
| Change in employment in an average week (millions) | -0.05 | -0.3 Median / 0 - -0.8 range | -1.3 Median / 0 - -3.7 range |
| Change in the number of people in poverty (millions) | -0.05 | -0.4 | -1.3 |
| Change in Real Annual Income: Families below poverty threshold (billions of 2018 dollars) | 0.4 | 2.3 | 7.7 |
| Change in Real Annual Income: Families between one and three times the poverty threshold (billions of 2018 dollars) | 0.3 | 2.3 | 14.2 |
| Change in Real Annual Income: Families between three and six times the poverty threshold (billions of 2018 dollars) | -0.05 | -0.3 | -2.1 |
| Change in Real Annual Income: Families with more than six times the poverty threshold (billions of 2018 dollars) | -0.6 | -5.1 | -28.4 |
| Change in Real Annual Income: All families (billions of 2018 dollars) | -0.1 | -0.8 | -8.7 |
A 2012 study led by Joseph Sabia estimated that the 2004-6 New York State minimum wage increase (from $5.15 to $6.75) resulted in a 20.2% to 21.8% reduction in employment for less-skilled, less-educated workers.[121] Similarly, a study led by Richard Burkhauser in 2000 concluded that minimum wage increases "significantly reduce the employment of the most vulnerable groups in the working-age population—young adults without a high school degree (aged 20-24), young black adults and teenagers (aged 16-24), and teenagers (aged 16-19)."[122]
The Economist wrote in December 2013 in sum that: "A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs...Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage...High minimum wages, however, particularly in rigid labour markets, do appear to hit employment. France has the rich world's highest wage floor, at more than 60% of the median for adults and a far bigger fraction of the typical wage for the young. This helps explain why France also has shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds."[123]
A 2018 University of Washington study which investigated the effects of Seattle's minimum wage increases (from $9.50 to $11 in 2015 and then to $13 in 2016) found that while the second wage increase caused hourly wages to grow by 3%, it also caused employers to cut employee hours by 6%, yielding an average decrease of $74 earned per month per job in 2016.[124] In a follow-up study, the researchers found that workers already employed at the time of the wage increase and with above-median experience saw their earnings go up by an average of $8-$12 per week, (with one-quarter of the earnings gains attributed to experienced workers making up for lost hours in Seattle with work outside the city limits) while the earnings of less-experienced workers saw no significant change. Additionally, the study associated the minimum wage increase with an 8% reduction in employee turnover, and a significant reduction of new workers joining the workforce.[125][126