The Effects of Minimum Wage Increases on the

Economy
One of the most studied topics of all of economics is the effect that raising the minimum
wage has on the economy. As with most things, there are both benefits and negative
consequences to increasing the minimum wage, and economists all over the world study and
debate whether, when taking into account the good and the bad, the overall effect is positive or
negative. This paper will discuss in what ways raising the minimum wage affects the economy,
the pros and cons, and whether or not it is a sound economic policy.
In a traditional analysis of economics using simplified modeling of supply and demand,
minimum wage increases introduce a price floor. When the government mandates a minimum
price for labor above that which pure capitalism dictates is the equilibrium price, the demand for
labor decreases, as employers are less willing to pay workers this higher price, and supply
increases, as workers are more willing to work for better wages. The new supply and demand
curve is shown below, with the gap between the supply curve intersecting the price floor (line F)
and the demand curve intersection the price floor showing an oversupply of labor, or
unemployment.

Thus, benefits of raising the minimum wage for lower classes are ultimately negated due to a
decrease in employment.
However, many economists point out that the issue is not nearly so black and white, as
this simplified model leaves out many factors that also come into play. Many people point to
Henry Ford, who paid his workers high enough salaries so that they could afford his product with
their extra buying power, benefiting both the company and the workers. Additionally, as lower
classes tend to spend a much higher percentage of earnings than other classes, the higher
spending power also translates to more economic activity, which in turn spurs job creation. The
Economic Policy Institute estimates that the institution of the Fair Minimum Wage Act of 2013,

which would raise the federal minimum wage all the way to $10.10, would instigate new
economic activity to the tune of over $30 billion.1
It also must be taken into account that the majority of minimum wage workers are
employed by large companies who look to expand business, and are not affected by rising wages
in the same way that small businesses are. Instead, they often accept the extra wage price in
order to reap incidental benefits that a simple model cannot calculate: lower turnover rates,
increased productivity, increased worker loyalty, etc. High turnover rates are costly to employers,
and they decrease productivity. In fact, the true reason Henry Ford originally decided to pay his
workers $5.00 and hour was to minimize turnover rate that was wreaking havoc on assembly line
productivity.2 High demand for jobs, a stable work force, worker morale, and heightened
productivity caused by an increase of worker pay more than made up for the cost of paying his
workers more. However, these factors do not have the same effect in every situation, and they
certainly cannot accurately be predicted in all cases. Thus, this issue is simply too complex to be
modeled accurately. Economists must then turn to anecdotal and empirical evidence and data to
properly understand and measure how raising the minimum wage truly affects the economy.
The United States provides a wealth of data on the true effects of raising minimum wage
on the surrounding economy. Differing ideas, political allegiances, and demographics translate to
a wide variety of economic plans in different areas. Some parts of the country embrace raising
the minimum wage, while others staunchly fight it. Many studies have been performed to
investigate these questions: does the price floor truly lead to higher unemployment? And if so, do
the benefits gained by those still employed overcome losses in employment? In a study by John
Schmidt, the Senior Economist at the Center for Economic and Policy Research in Washington,
D.C., Schmidt studied a compilation of research reports since 2000 concerning minimum wage
hikes and their subsequent effects on the surrounding economy. In it, he concludes that the
weight of that evidence points to little or no employment response to modest increases in the
minimum wage.3 Contrary to popular belief and the teachings of basic economics, when applied
in small increments, it was found through a compilation of large amounts of independent
empirical study that minimum wage increases have little to no effect on employment. According
to the report, the major factors most likely causing the absence of an increase in unemployment
include reducing organization inefficiencies, lower turnover rate, and marginally increasing
prices of goods by the company, all of which diminish the impact of the price floor.
In another, peer reviewed study by Institute for Research on Labor and Employment at
the University of California, Berkley, it was found that the national labor demand elasticity

Raising The Federal Minimum Wage To $10.10 Would Give Working Families, And The
Overall Economy, A Much-Needed Boost, by D. Cooper and D. Hall, 2013, Economic Policy
Institute.
2

Department of Natural Resources. (2010, 8 18). The assembly line and the $5 day background reading. Retrieved from http://www.michigan.gov/dnr/
0,1607,7-153-54463_18670_18793-53441--,00.html
3

Why Does the Minimum Wage Have No Discernible Effect on Employment? John Schmidt,
2013, Center for Economic and Policy Research.

estimate is -1.4 This would support the simple models assertion, suggesting that unemployment
increases evenly as minimum wage increases, netting no benefit. However, the study continues
to say that data gathered by the study on restaurant workers in a location where minimum wage
was raised not only did not follow this estimate, but elasticity was found to be at maximum
-0.48. Thus, raising the minimum wage did, in fact, increase the net earnings of restaurant
workers, as the higher wage being earned was much more significant than any loss in
employment.
Economists David Card (UC Berkley) and Alan Krueger (Princeton and former United
States Assistant Secretary of the Treasury for economic policy) published a similar study to the
American Economic Review, a peer reviewed journal considered one of the most prestigious in
the economic field. In it they studied two contiguous counties, one in New Jersey (which had just
raised its minimum wage by nearly 20%- from $4.25 to $5.05) and one in Pennsylvania (where
minimum wage stayed constant). In the conclusion of their study, they wrote that Contrary to
the central prediction of the textbook model of the minimum wage, but consistent with a number
of recent studies based on cross-sectional time-series comparisons of affected and unaffected
markets or employers, we find no evidence that the rise in New Jersey's minimum wage reduced
employment at fast-food restaurants in the state.5 In fact, the paper continues to say that, not
only did unemployment not rise due to the increase in minimum wage, but we find that the
increase in the minimum wage increased employment. This groundbreaking paper won David
Card the John Bates Clark medal, awarded by the American Economic Association to that
American economist under the age of forty who is adjudged to have made a significant
contribution to economic thought and knowledge.
Once it has been established through empirical study that, in general, raising the
minimum wage incrementally has little if any negative impact on employment (which is
traditionally the most popular argument against this policy), what is left is to establish what the
effects are, and whether or not it is a good policy. Costco CEO (which pays a starting salary of
$11.50) Craig Jelinek has said that Instead of minimizing wages, we know it's a lot more
profitable in the long term to minimize employee turnover and maximize employee productivity,
commitment and loyalty. We support efforts to increase the federal minimum wage.6 The
Economic Policy Institute reported that, by putting more buying power in the hands of the lower
economic classes that spend higher percentages of income than other classes, raising minimum

Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties by A.
Dube, T. Lester, and M. Reich, 2010, Working Paper Series, Institute for Research on Labor and
Employment, UC Berkeley.
5

Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey
and Pennsylvania, by D. Card and A. Krueger, 1994, The American Economic Review, Vol. 84,
No. 4. pp. 772-793.
6

Keener, B. (2013, 3 4). Costco, Eileen Fisher and small business owners nationwide support
fair minimum wage act introduced today in congress. Retrieved from http://
www.businessforafairminimumwage.org/news/00272/costco-eileen-fisher-and-small-businessowners-nationwide-support-fair-minimum-wage-act-i

wage would boost the earnings of working families hardest hit by the Great Recession, spur
economic growth, and create about 140,000 net new jobs.7
However, not all of the effects of raising the minimum wage are positive. While it is true
that employment is not usually significantly impacted, another argument against raising the
minimum wage does have merit. In David Card and Alan Kruegers aforementioned study, they
wrote that we find that prices of fast-food meals increased in New Jersey relative to
Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to
consumers.8 However, they found this to be mostly true in fast food restaurants alone, as they
wrote we find no evidence that prices increased more in stores that were most affected by the
minimum-wage rise.9
In conclusion, it must kept in mind that economic implications of policy changes cannot
ever be predicted with 100% accuracy, and the same policy may not always have the same effect
when applied to different areas. However, empirical evidence shows that, overall, the positive
effects of raising the minimum wage incrementally outweigh the negatives. The IGM Economic
Experts Panel, a group of economics experts predominately comprised of Ivy League professors,
was given the following statement: The distortionary costs of raising the federal minimum wage
to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to
low-skilled workers who can find employment that this would be a desirable policy. In
response, 5% strongly agreed and 42% agreed with the statement, compared to 3% who strongly
disagreed and 8% who disagreed.10 Thus, while there are undeniably both positive and negative
effects of raising the minimum wage, when weighing the good with the bad, there is strong
evidence and consensus amongst experts that it is a sound and overall beneficial policy, despite
what simple modeling and introductory economics textbooks teach about the subject.

Raising The Federal Minimum Wage To $10.10 Would Give Working Families, And The
Overall Economy, A Much-Needed Boost, by D. Cooper and D. Hall, 2013, Economic Policy
Institute.
8

Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey
and Pennsylvania, by D. Card and A. Krueger, 1994, The American Economic Review, Vol. 84,
No. 4. pp. 772-793.
9

IBID

10

IGM Economic Experts Panel, (2013). Minimum wage. Retrieved from website: http://
www.igmchicago.org/igm-economic-experts-panel/poll-results?
SurveyID=SV_br0IEq5a9E77NMV

Works Cited
Department of Natural Resources. (2010, 8 18). The assembly line and the $5 day - background
reading. Retrieved from http://www.michigan.gov/dnr/
0,1607,7-153-54463_18670_18793-53441--,00.html
IGM Economic Experts Panel, (2013). Minimum wage. Retrieved from website: http://
www.igmchicago.org/igm-economic-experts-panel/poll-results?
SurveyID=SV_br0IEq5a9E77NMV
Keener, B. (2013, 3 4). Costco, Eileen Fisher and small business owners nationwide support fair
minimum wage act introduced today in congress. Retrieved from http://
www.businessforafairminimumwage.org/news/00272/costco-eileen-fisher-and-small-businessowners-nationwide-support-fair-minimum-wage-act-i
Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties by A.
Dube, T. Lester, and M. Reich, 2010, Working Paper Series, Institute for Research on Labor and
Employment, UC Berkeley.
Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and
Pennsylvania, by D. Card and A. Krueger, 1994, The American Economic Review, Vol. 84, No.
4. pp. 772-793.
Raising The Federal Minimum Wage To $10.10 Would Give Working Families, And The Overall
Economy, A Much-Needed Boost, by D. Cooper and D. Hall, 2013, Economic Policy Institute.
Why Does the Minimum Wage Have No Discernible Effect on Employment? John Schmidt,
2013, Center for Economic and Policy Research.