What Happens When You Raise The Minimum Wage?

In his 2014 State of the Union address, President Obama advocated for an increase in the minimum wage and made it a centerpiece of his plan to help working Americans make ends meet. Though both sides of the issue recognize a need to address poverty in America, there is disagreement over whether a minimum wage increase is the best tool to use. A study by the Mercatus Center takes a look at arguments for and against raising the minimum wage as well as its unintended consequences and examines the evidence surrounding the issue. Some key highlights from the study:

  • Less Than 3 Percent Of Workers Earn The Minimum Wage. “[M]inimum wage workers constitute between 1.6 percent and 2.8 percent of all US workers. Of all minimum wage workers, 44 percent work in a single industry: food service and preparation.”
  • The Data Indicates That Increases In The Minimum Wage Are “Significantly And Positively Related” To Increases In Unemployment Among The Least Educated And Least Skilled Workers. Consistent with the traditional argument against raising the minimum wage, “[t]he data indicate that, as the relative minimum wage rises, the workers with the least education and the fewest skills are the ones who suffer the worst increases in unemployment.” This makes sense, the author explains, because “workers compete for jobs on the basis of education, skill, experience, and price. Of these factors, the only one on which the lesser-educated, lesser-skilled, and lesser-experienced worker can compete is price. The minimum wage takes away even this last competitive factor.”

  • New Jersey, Which Approved A Minimum Wage Increase In November From $7.25 To $8.25, Could See Higher Unemployment Rates Among Workers Without A High School Education. “By applying this change in the relative minimum wage to the regression estimates, one can expect the increase in the minimum wage to increase the unemployment rate among workers without a high school education by almost one percentage point for workers 25 or older, and over two percentage points for workers 24 or younger.”
  • Raising The Minimum Wage Might Actually Increase Income Inequality. In his model, the author found that “[t]he results show a significantly positive relationship between the relative minimum wage and income inequality, after filtering out the effects of education and median household income.” In fact, “[a]s of 2011, New Jersey’s Gini income inequality index was 0.4694, making it the 34th out of 51 states for equitable incomes. An increase of 0.003 [resulting from raising the minimum wage from $7.25 to $8.25] would increase New Jersey’s inequality index to 0.4724, dropping the state to 38th in the income equity list.”


To read the full report and a discussion of the arguments surrounding a minimum wage increase, click here.

This article was posted to Economy category.

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