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What Really Happens When You Raise The Minimum Wage

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"What Really Happens When You Raise The Minimum Wage"

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Barista low wage worker

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The Congressional Budget Office (CBO) released a new report on Tuesday on the impacts of raising the minimum wage to $10.10 an hour and $9 an hour. It found that a $10.10 minimum wage, implemented by 2016, would mean higher earnings for 16.5 million workers, resulting in $31 billion more in higher earnings. It would also lift nearly 1 million people out of poverty.

But it also found that an increase would reduce jobs slightly. “Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent,” it projects. That figure takes into account what it says would be a decrease in jobs for low-wage workers as well as an increase of “a few tens of thousands of jobs” for others thanks to higher demand. “Once the increases and decreases in income for all workers are taken into account, overall real income would rise by $2 billion,” it says. The vast majority of people impacted, over 95 percent, will be impacted positively.

It attributes the job losses to employers increasing prices to deal with the higher wage, which would lower demand and therefore their need for more workers, as well as to some employers substituting machines or technology for workers due to the higher cost of wages.

But businesses may respond to a higher minimum wage in other ways. In a paper for the Center for Economic and Policy Research, John Schmitt argues that they can benefit from improved efficiency and lower turnover. A higher wage may lead employers to push employees to work harder, which can be preferable to cutting hours or workers. In fact, the majority of fast food restaurants in Georgia and Alabama said they would respond to a minimum wage increase with higher performance standards. A higher wage can also make it easier to recruit and retain workers, which can improve the bottom line. Dealing with turnover can be costly: replacing someone can cost as much as 20 percent of her salary.

Other studies have found that while some job losses may occur, there can still be an economic net gain thanks to the fact that so many workers will have more money to spend. A $10.10 minimum wage would mean a direct raise for 16.7 million workers, according to the Economic Policy Institute, who would then have more money in their pockets to spend on goods and services, boosting the economy. It also found that a gradual increase to $10.10 by 2016 would increase wages by $35 billion, which would boost GDP growth by about $22 billion.

The Federal Reserve Bank of Chicago found that even when potential job losses are taken into account, an increase in the minimum wage to $9, as President Obama proposed in his 2013 State of the Union, would increase household spending by $28 billion, or 0.2 percent of GDP. That extra spending stimulates the economy, which can lead to more job growth.

There is also real world evidence that minimum wage increases don’t hurt jobs. David Madland and Keith Miller analyzed minimum wage increases at the state level over two decades and “found no clear evidence that the minimum-wage increases affect aggregate job creation when unemployment rates are high.” After looking at the increases during times 7 percent unemployment or more, the rate actually declined 52 percent of the time and in a few cases remained unchanged. The authors also point to five other studies that did the same state-level analysis while controlling for other factors that could impact employment and similarly found “no discernable effect on employment levels.”

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