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What are the impacts of raising the minimum wage?

Proposals to raise the Federal minimum wage appear every year, and with these proposals come the question: What would be the effects of raising the minimum wage? The fact that the question keeps being asked, and that economists continue to develop models to try to answer the question, suggests that there is no clear-cut answer.

Currently, the Federal minimum wage stands at $5.15 per hour, with a lower minimum for workers who earn tips. There are several other specific provisions, and many states also have their own minimum wage laws, including those that are higher than the current Federal minimum. The last increase came in 1997 when the minimum wage rose from $4.75 to $5.15 per hour. The bill under consideration now would raise the minimum to $7.25 over a two-year period.

Generally speaking, proponents of a minimum wage hike point out the decline in the purchasing power of the minimum wage rate. That is, a constant minimum wage in the face of rising prices indicates a decline in the inflation-adjusted minimum wage over time. They argue that raising the minimum wage will provide a boost to lower income workers. Further, most proponents recognize that raising the minimum wage will impose additional costs on businesses, but that these costs may be offset due to positive effects of higher wages on turnover, training costs, productivity, and by improving the purchasing power of low-wage workers.

At the same time, opponents of raising the minimum wage point to the conventional economic theory that raising the minimum wage has some combination of negative effects on employment, either in terms of number of positions or hours worked, and higher labor costs being passed on to consumers in the form of higher prices. Empirical studies often find that raising the minimum wage leads to employment losses. However, the magnitude and statistical significance of these findings differ sharply across studies that rely on different datasets, models, and assumptions.

Overall, solid empirical evidence for either side is difficult to come by. As is often the case in statistical analysis, there are so many factors influencing trends in employment, prices, and living standards, that it is difficult to pinpoint the precise impact of adjusting a policy variable like the minimum wage. Ultimately, a rise in the minimum wage – as is the case with most changes to policy – likely produces both winners and losers. The challenge for policymakers, then, is to weigh the benefits for the winners against the costs for the losers. Unfortunately, economic analyses are able to produce very different estimates of the magnitude of these relative benefits and costs. This, in part, is why the minimum wage is always such a contentious issue.
 

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