For the past several years, there has been an intense debate over whether or not there should be an increase in the United States’ minimum wage. While the vast majority of Americans favor raising the minimum wage to $15-an-hour, there have been those who claim that such a move would pose a threat to the economy, potentially causing massive job losses, and possibly even reducing incomes for low-wage workers. In order to assess the truth of these claims, it is necessary to look through the available evidence on the topic. As always, all sources are listed at the end.
Does the Minimum Wage Cause Unemployment?
For many years, the majority of economists argued that the minimum wage caused higher unemployment, because it imposes a price floor, and therefore distorts the function of supply-and-demand. However, it eventually became apparent that the empirical research did not support this view. Most notably, a famous study by David Card and Alan Krueger (often simply called “the Card-Krueger study”) examined the fast-food industries in New Jersey (which had raised its minimum wage from $4.25 to $5.05 per hour) and Pennsylvania (which had no such increase), with the following results:
Our empirical findings challenge the prediction that a rise in the minimum [wage] reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent.
Two later meta-analyses of minimum wage studies, one from Doucouliagos and Stanley, and another from Card and Kruger themselves, found no evidence of a negative impact on employment. In addition, both found substantial evidence of publication bias (i.e. a bias towards publishing negative results), which had likely contributed to the prior negative perception of minimum wage laws.
More recent studies have continued to support the finding that minimum wages do not notably increase unemployment. A 2010 paper from the UC Berkeley Institute for Research on Labor and Employment found “no detectable employment losses from the kind of minimum wage increases we have seen in the United States.” The authors note that “traditional approaches that do not account for local economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated to minimum wage policies.”
A 2019 study in The Quarterly Journal of Economics examined “138 prominent state-level minimum wage changes between 1979 and 2016 in the United States using a difference-in-differences approach,” finding no evidence of a negative employment impact in most sectors. As they put it:
We find that the overall number of low-wage jobs remained essentially unchanged over the five years following the increase. […] Our estimates by detailed demographic groups show that the lack of job loss is not explained by labor-labor substitution at the bottom of the wage distribution. We also find no evidence of disemployment when we consider higher levels of minimum wages. However, we do find some evidence of reduced employment in tradeable sectors.
A 2019 study from UCLA examined the employment impact of the minimum wage in a concentrated labor market, finding that under certain conditions, the minimum wage can actually increase employment. To quote:
We find that more concentrated labor markets — where wages are more likely to be below marginal productivity — experience significantly more positive employment effects from the minimum wage… minimum wage-induced employment changes become less negative as labor concentration increases, and are even estimated to be positive in the most highly concentrated markets. Our findings provide direct empirical evidence supporting the monopsony model as an explanation for the near-zero minimum wage employment effect documented in prior work.
Most recently, a 2021 study from Princeton University evaluated the impact of increased minimum wages on the fast-food industry, using McDonald’s as a case study. Their results were as follows:
Higher minimum wages are not associated with faster adoption of touch-screen ordering, and there is near-full price pass-through of minimum wages, with little heterogeneity related to how binding minimum wage increases are for restaurants. Minimum wage hikes lead to increases in real wages (expressed in Big Macs an hour of Basic Crew work can buy) that are one fifth lower than the corresponding increases in nominal wages.
In other words, increased minimum wages are not corelated with faster automation, meaning that the next time you’re forced to use a touch-screen kiosk at McDonald’s, it won’t be because of the minimum wage. Though minimum wage increases did lead to some small increase in prices, this was more than outweighed by the increased purchasing power enjoyed by workers, leading to a notable increase in their real incomes.
The growing consensus on this topic is best expressed by a 2020 literature review commissioned by the British government, which found the following:
Overall the most up to date body of research from US, UK and other developed countries points to a very muted effect of minimum wages on employment, while significantly increasing the earnings of low paid workers. Importantly, this was found to be the case even for the most recent ambitious policies.
In general, the majority of economic research suggests that minimum wage increases have little-to-no negative employment effects, with any impacts that may exist concentrated in tradeable sectors. They also seem to lead to a notable increase in real incomes for low-wage workers. On that note, let’s delve a little more into the impact of minimum wages on incomes and poverty.
Low-Wage Incomes and Poverty Reduction
Evidence indicates that increasing the minimum wage will lead to higher incomes for low-wage workers, as well as a notable reduction in poverty. A 2019 study in the American Economic Journal: Applied Economics found that an increased minimum wage is associated with a sharp reduction in poverty, and a large increase in incomes. To quote:
There is robust evidence that higher minimum wages increase family incomes at the bottom of the distribution. The long-run (3 or more years) minimum wage elasticity of the non-elderly poverty rate with respect to the minimum wage ranges between −0.220 and −0.459 across alternative specifications.
A 2019 article from the American Economic Association (released to coincide with the aforementioned study) notes that “minimum wage laws significantly increased incomes for the poorest households.” To quote:
Increasing the federal minimum wage from the current $7.25 an hour to $12 an hour would reduce the poverty rate by as much as 2 percentage points, according to Dube’s estimates. Put differently, it would lift roughly 6 million Americans out of poverty. Overall, Dube’s research indicates that minimum-wage policies are just as effective as other anti-poverty programs.
Similarly, a 2021 study in The Quarterly Journal of Economics examined the minimum wage expansion and increase that came along with the 1966 amendment to the Fair Labor Standards Act, finding that “earnings rose sharply for workers in the newly covered industries,” with “no aggregate effect” on employment. The reform also helped to narrow the racial wealth gap. To quote:
The impact was nearly twice as large for black workers as for white workers. […] The 1967 extension of the minimum wage can explain more than 20% of the reduction in the racial earnings and income gap during the civil rights era… minimum wage policy can play a critical role in reducing racial economic disparities.
Most recently, a 2021 paper from the NBER looked at the impact of minimum wage increases on labor market outcomes, saying:
In line with much of the existing evidence in the literature, we find that the minimum wage has a positive and significant impact on wages, while employment effects are modest in the U.S. context. We also show that the slight (statistically insignificant) employment increase comes from a slight drop in unemployment and a slight increase in the participation rate. These responses indicate that the minimum wage is unlikely to have a negative impact on workers by discouraging them to search for new jobs.
These effects seem to hold true when examining more specific sectors and demographics. For example, a 2019 study in the American Journal of Public Health examined the impact of minimum wage increases on female healthcare workers, with the following result:
Raising the minimum wage to $15 per hour would reduce poverty rates among female health care workers by 27.1% to 50.3%.
Minimum wage laws seem to reduce wage inequality as well. A 2020 study from IZA examined wage inequality in Germany, finding that “the introduction of the minimum wage can account for about half of the recent decrease in wage inequality.”
Interestingly, there is even increased support for a poverty-reducing effect of minimum wages in developing countries. One study from IZA found that “Raising the minimum wage reduces poverty in most developing countries,” though the effect is somewhat modest, due to the large informal labor markets that often exist in these countries. Similarly, a 2021 study in the journal World Development found that “Increases in the minimum wage cause poverty and income inequality to decline in Brazil.”
All-in-all, there is substantial evidence that increases in the minimum wage reduce poverty, increase overall incomes, and reduce wage inequality. They also play a critical role in reducing the racial economic gap.
Social Impacts of the Minimum Wage (Health, Crime, etc.)
There is extensive evidence that the minimum wage has a whole host of beneficial social effects. For example, a 2021 study in the journal Preventative Medicine found that “Each dollar of minimum wage may reduce infant deaths by 1.5–1.8% in metro counties.” This becomes all the more striking when one considers that the United States has a higher infant mortality rate than peer countries, even after adjusting for reporting differences.
Another 2021 study, this one in the journal Economics Letters, found that “Increases in minimum wages are associated with a decline in teenage birth rates,” while a 2018 study from the NBER found that a higher minimum wage reduces criminal recidivism.
A 2020 study in the British Medical Journal found that a higher minimum wage is associated with a notable decline in suicide rates, particularly among low-income workers:
Minimum wage increases appear to reduce the suicide rate among those with a high school education or less, and may reduce disparities between socioeconomic groups. Effects appear greatest during periods of high unemployment.
A 2018 article in the journal Health Affairs examined numerous recent studies on the matter, concluding that “the evidence suggests that increases in minimum wages improve health for low-wage or low-skilled continuously employed adults.” Similarly, a 2021 article in the JAMA Health Forum examined the recent research, saying the following:
Some of the strongest existing research on health outcomes associated with wage increases hint at what could happen if the federal minimum wage were increased to $15 per hour. Researchers have observed associations between increased wages and decreases in both suicide mortality and hypertension, better birth outcomes, and lower rates of sexually transmitted infections among women.
All-in-all, there is strong evidence that an increased minimum wage is associated with all manner of improved social outcomes, ranging from health, to crime, to suicide. Coupled with the aforementioned economic impacts, it seems quite clear that low-income and working-class people benefit strongly from increases in the minimum wage.
Prices and Inflation
Despite what you may have heard, there is little-to-no evidence that the minimum wage increases inflation. A 2004 meta-analysis from IZA found no evidence of significant increases in prices after minimum wage increases. Similarly, a 2020 study in the journal Economics Letters found that inflation declined after raising the minimum wage. This study is particularly useful, as it observes the effects of a very large increase (the minimum wage was doubled). To quote:
Analysis suggests that the minimum wage increase had little or no effect on prices. […] Annual inflation decreased by 1.8 percentage points, suggesting that the minimum wage increase had a limited or even null effect on prices.
A paper from the Upjohn Institute corroborates these results, finding no evidence of inflation when the minimum wage was raised.
Having looked at the evidence, it seems apparent that minimum wage increases have little-to-no negative employment effects (with any impacts that do exist concentrated in tradeable sectors). In addition, they appear to have a strongly positive impact on real incomes, poverty reduction, public health, inequality, and a host of other outcomes. Raising the minimum wage is a not merely an extremely popular policy; it is also well-grounded in the evidence.
- Pew Research Center | Two-Thirds of Americans Favor Raising the Federal Minimum Wage to $15-an-Hour
- National Bureau of Economic Research | Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania
- British Journal of Industrial Relations | Publication Selection Bias in Minimum‐Wage Research? A Meta‐Regression Analysis
- American Economic Review | Time-Series Minimum-Wage Studies: A Meta-Analysis
- UC Berkeley Institute for Research on Labor and Employment | Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties
- The Quarterly Journal of Economics | The Effect of Minimum Wages on Low-Wage Jobs
- UCLA | Minimum Wage Employment Effects and Labor Market Concentration
- Princeton University | Wages, Minimum Wages, and Price Pass-Through: The Case of McDonald’s Restaurants
- UK Government Report | Impacts of Minimum Wages: Review of the International Evidence
- American Economic Journal: Applied Economics | Minimum Wages and the Distribution of Family Incomes
- American Economic Association | Fighting Poverty With a Living Wage
- The Quarterly Journal of Economics | Minimum Wages and Racial Inequality
- National Bureau of Economic Research | Seeing Beyond the Trees: Using Machine Learning to Estimate the Impact of Minimum Wages on Labor Market Outcomes
- American Journal of Public Health | Economic Vulnerability Among US Female Health Care Workers: Potential Impact of a $15-per-Hour Minimum Wage
- IZA | Wage Inequality in Germany After the Minimum Wage Introduction
- IZA | Does Increasing the Minimum Wage Reduce Poverty in Developing Countries?
- World Development | Can the Minimum Wage Reduce Poverty and Inequality in the Developing World? Evidence from Brazil
- Preventative Medicine | Effects of US State Preemption Laws on Infant Mortality
- American Economic Journal: Economic Policy | Why is Infant Mortality Higher in the United States Than in Europe?
- Economics Letters | The Effects of Minimum Wages on Teenage Birth Rates
- National Bureau of Economic Research | The Minimum Wage, EITC, and Criminal Recidivism
- British Medical Journal | Effects of Minimum Wages by Unemployment Rates on Suicide in the USA
- Health Affairs | Effects Of Minimum Wages On Population Health
- JAMA Health Forum | Raising the Minimum Wage and Public Health
- IZA | The Effect of the Minimum Wage on Prices
- Economics Letters | The Effect of Doubling the Minimum Wage and Decreasing Taxes on Inflation in Mexico
- Upjohn Institute | Does Increasing the Minimum Wage Lead to Higher Prices?