How it Works
The minimum wage is the lowest amount an employer can legally pay employees for their labor. Most countries have minimum wage laws, though the details vary by country, region, and industry. Some states have their minimum wages that are higher than the federal rate.
The purpose of the minimum wage is to provide workers with a sufficient income to afford necessities and to discourage employers from exploiting their workers by paying them less than a living wage. Some groups have been specifically excluded from the minimum wage, including executives and administrators who may have substantial bargaining power, professionals such as lawyers and doctors, full-time students, and certain domestic workers.
Many proponents of raising the minimum wage argue that it will help lift millions of low-wage workers out of poverty, resulting in reduced reliance on safety-net programs such as food stamps and Medicaid and billions of dollars in new tax revenues. Other benefits of a rising minimum wage include improved employee morale, reduced absenteeism, lower turnover costs, and lower recruiting and training expenses.
However, several studies have analyzed how minimum wage increases affect employment. In a recent study, economists found that the prevailing view that a minimum wage increase will cause firms to hire fewer workers is based on an incorrect assumption about how firms respond to cost changes. The response to a minimum wage increase depends on nonwage aspects unrelated to the number of hours worked, such as health insurance costs, working conditions, schedule flexibility, and production technology.
What You Need to Know
Sometimes, businesses may struggle to maintain profit margins if they pay their workers more. As many economists and business executives warn, it could result in them cutting jobs. This is especially true if the business operates in an industry with slim profit margins, such as restaurants.
Businesses can also pass these extra labor costs on to their consumers by raising product or service prices. It can be a problem for lower-income households, which spend a larger proportion of their income on essential goods and services such as haircuts, restaurant meals, electricity, water, and construction.
Some states and localities have enacted laws that require employers to pay their employees more than the federal minimum wage. In addition, some states index their minimum wage rates to the consumer price index (CPI), a commonly used measure of inflation.
However, a nonpartisan analysis from the Congressional Budget Office (CBO) in 2021 found that if wages were to rise to $15 an hour, this would reduce employment by increasing amounts from 2021 to 2025. Furthermore, in countries with large shadow economies, where some workers earn under-the-table wage supplements or "envelope payments," raising the minimum wage might prompt employers to reduce these envelope payments and leave overall compensation unchanged. In other cases, employers might evade compliance with minimum wage laws by hiring fewer people or working fewer hours.
What You Can Do
A growing number of states are raising their minimum wage above the federal level. As a result, millions of workers will see an increase in their paychecks, regardless of whether they live in a state that follows the federal minimum wage.
One big concern some people have with the rise of the minimum wage is that it will cause companies to cut jobs or move operations to other states. But that's not necessarily the case, says a new study by UC Berkeley economists and Harvard researchers. They studied a major retailer with over 2,000 stores nationwide and employed 40,000 salespeople. The researchers looked at productivity data from each store and found that higher wages didn't lead to lower sales or fewer employees. Instead, higher wages led to better worker productivity—in other words, a greater percentage of sales per hour for each employee.
The study also analyzed data on store profits, employee turnover, and other factors that might have affected productivity, and they found that higher wages weren't linked to a decrease in employee morale or a higher churn rate. Higher salaries can help businesses by reducing hiring and training costs.
Higher wages benefit businesses by increasing consumer spending. The Economic Policy Institute estimates that a $15 minimum wage would put more discretionary dollars in the pockets of low-income households, which could boost spending in restaurants and other places where workers are paid the new minimum wage.
Why It Matters
Supporters of minimum wage increases argue that putting more money in the pockets of low-wage workers will boost consumption, reduce poverty, and increase economic productivity. On the other hand, critics point out that forcing businesses to pay higher wages will increase operating costs. Some companies will be forced to raise prices for their products and services to cover these increased labor costs, which can lead to lower sales and reduced employment.
The current federal minimum wage stands at $7.25 per hour and has remained there for 14 years, the longest period without an increase since the minimum wage was first established in 1938. This is a significant amount of time that working families who rely on a single paycheck to support their children have had to endure poverty and other hardships.
Research shows that raising the minimum wage has positive outcomes, including reducing poverty rates and strengthening family economic security. It also helps prevent families from being pushed out of the workforce by having to depend on government benefits for assistance with basic needs like food and shelter. Raising the minimum wage would allow workers to lock in recent pay gains and help close the gap between average salaries and poverty rates. It is an important step toward addressing the needs of millions of families and strengthening our economy.