What Are the Drawbacks of Raising the Minimum Wage?

by Emily Guy Birken · 16 comments

Last week, I explored three of the common benefits of raising the minimum wage. While the conventional wisdom suggests these minimum wage hikes will stimulate the economy, improve entitlement programs, and reduce turnover rates for businesses, the research has shown that those benefits aren’t nearly as clear-cut as the sound bytes might lead you to believe.

This week, we’ll examine what the research says about the most common arguments against raising the minimum wage:

A Wage Hike Increases Unemployment

One of the biggest arguments against minimum wage increases is the potential effect on national unemployment. Basic economic theory posits that businesses required to spend more on low-wage workers hire fewer of those workers in order to maintain their bottom line. In fact, the Congressional Budget Office has projected that raising the minimum wage to $10.10 would reduce total employment by approximately 500,000 workers (or 0.3%).

As Rex Huppke of the Chicago Tribune puts it: “If you look at the CBO’s estimates, it seems that a decision on raising the federal minimum wage could boil down to a moral quandary: Is it better to lift up 16.5 million people while leaving 500,000 unemployed, or would the country be better off making sure there are more jobs, even if it means lower wages?”

As a matter of fact, that moral quandary often seems to be the center of the debate on minimum wage (which you can see played out in the comments on last week’s piece.)

However, there does still seem to be more to explore within the realm of pure numbers. There are a huge number of variables that go into determining what effect minimum wage increases will have on unemployment and the economy as a whole.

It’s impossible to know if employers will respond to a wage hike by eating the loss, firing employees, reducing the wages of higher-paid employees, passing the costs on to customers, becoming more efficient, or some combination of all of these. Without a crystal ball, it’s impossible to pin down any of the variables. (And this is why economists often have worse reputations for accuracy than meteorologists).

It’s also important to note that economists themselves are sharply divided on the effect of minimum-wage increases on unemployment. A study by leading economists found no evidence that minimum wage hikes lowered employment, compared to trends in areas that didn’t see an increase in the minimum wage.

Other studies have similar findings, although many more do see a correlation between increased minimum wages and higher unemployment. But with the number of variables that go into our economy, there’s no way to know for certain.

Raising the Minimum Wage is Too Expensive

According to the CBO, the increased earnings by raising the minimum wage to $10.10 would amount to $31 billion. While we think of that as “earnings,” it’s important to remember there is a cost. Employers and small business owners will potentially be seeing their profits decrease by that amount, meaning that we could look at those earnings as a net cost to American industry.

Considering the fact that only 19% of those additional earnings (not quite $6 billion) would be going to families living in poverty, it could be argued that the overall cost is greater than the potential benefit to the poor.

As a matter of fact, economist Adam Ozimek has pointed out that increasing the Earned Income Tax Credit for large families and single people has about the same net effect on the finances of the poor — while costing about one-fifth as much as a wage hike. (The numbers from Ozimek’s study were from the 2007 wage hike, but the effect is the same in 2014). As that piece puts it, this “suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.”

The Bottom Line

There’s no clear right answer when it comes to raising the minimum wage, and intelligent and compassionate people can honestly disagree with each other on this issue. The important thing is that all sides of the issue are examined carefully before any particular plan is implemented. As a society, we should attempt to do the most good at the lowest cost — and recognize that we’ll never achieve perfection.

Which side of the debate do you fall on? Do you agree with these drawbacks of raising the minimum wage?

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{ read the comments below or add one }

  • Gary Kerr says:

    Whatever can we conclude, But instead of diving into that controversy, all tend to think that raising the minimum wage would reduce poverty. That’s a significant increase in the quality of life for our worst off that doesn’t require the government to tax and spend a single additional dollar.

    • Christina Habib says:

      You are right it would improve in the short term, but what about the long term. America keeps increasing the minimum wage to keep up with the mainstream quality of life. I believe that we need to figure out a way that businesses that choose to pay their employees minimum wage and making millions of dollars in profit need to be accountable about the quality of life of their employees. This way small businesses will not be hurt by the increase in pay on their budget. Possible “bonuses” could include free child care for their children, an allowance for groceries, a loan for housing, etc. These are all provided by the goverenment for those in poverty, but instead of the government being responsible for the payments it would go to the ones who are responsible for those who are in poverty. Just an idea!

      • David Ning says:

        Interesting idea Christina. I think we really need to incentives people in poverty to get a solid education/in demand skill set in hopes of increase the likelihood of upward mobility.

        This is going to be a long term project, but maybe we should give out food stamps for able people only when they pass certain classes. And when enough people are working better jobs, then there will be less supply of lower waged workers and businesses will naturally have to inflate the minimum wage to attract enough people to work at those jobs.

  • Minimum wage is the only major competitive tool that the U.S. has towards Asia and other low-cost countries. The moment the minimum wage goes up, imports increase and unemployment is rising in the United States. Sorry, but it affected population in the U.S. hard, but it’s the end way to get the U.S. on strong economic feet again.

  • Darrin Dedelow says:

    I am a union worker. I believe that if a business can invest millions o f dollars in NASCAR for advertising why cant the same company pay their employees more. Isn’t a happy employee better advertisement.
    And for any union bashers out there. I earn my money and I m proud of my status in America.

    • David Ning says:

      You are right Darrin, but companies that spend millions on advertising for NASCAR have tens of thousands of workers. That $2 million equates to about 10 cents more for 10,000 full time workers. Is everybody going to be happy with a 10 cent increase to a point where they’ll materially increase brand perception?

      The issue isn’t so cut and dry.

    • Phil says:

      I am not particularly for or against unions. But, I will say this…if America’s “minimum wage” workers want to unionize for more pay I am all for it. And the employers can decide whether to pay this new wage, or use “scabs” to do the work. But if they can use scabs to do the work, then what they are paying the scab is what the “minimum wage” worker is worth.

      Bu that whole process is waaaaay better than the government telling employers what to do so they can get re-elected.

  • Christina says:

    I thought I had today is that there are professions out there that are not in the middle of this debate that will be effected if the minimum wage is raised. As a nanny, I only get paid 10-15 an hour. No offense, but I do not want to get paid the same amount as a fast food worker or a job that does not have the amount of responsibility that we do. We will want to get paid more ourselves. This will result in our “employers” needing to be paid more by their jobs to afford the quality of care they are accustomed too. I think raising it to the amount that people are saying is ridiculous and will put us in a recession or even worse depression faster than Bush ruining the economy. We need to slowly raise the minimum wage for our economy to grow accustomed to it. Not suddenly jump a couple of dollars.

    • David Ning says:

      You bring up an interesting point about wanting to be paid more as a baby sitter if any job can get you at least $10. In Hong Kong, they enacted (or maybe it was just increasing) a minimum wage and there’s all of a sudden shortage of workers willing to wash the dishes at restaurants. Because every job pays the same, everyone just wants to do the easier jobs!

  • Phil says:

    Again, we already have a minimum wage. And I don’t mean the large monopoly with guns that can ruin a man’s life (aka the government).

    I mean, in the form of a question, what is the “minimum wage” someone is willing to get paid? Me…I don’t like to leave my house for less than $30 per hour. I have two college degrees and have my National Board certification (google it). I actually make more than that…but I am willing to do some side work for $30 per hour.

    What is your “minimum wage”?

    Finally, as soon as an article like this is published, we automatically envision person making the minimum wage. We say, we must “protect” them. We must make sure they have a “living wage”. And “only the government can do it.”

    But think about the employer for a minute. They need someone to do something. They are concerned they are not going to be able to find that someone, and if they do, that that someone will leave them. Yeah…Employers have concerns too. Don’t get me wrong…there are some employers who would try less than today’s minimum wage, but it wouldn’t work. People wouldn’t come, and if they did, they would leave too soon, costing the employer money.

    There is NO need for the government to set a minimum wage. The free market does it. It is really that simple. And honestly, the government is really encroaching on people’s freedom. If I, as an employer, want to try to pay someone $.25 per hour, the government has no write to step in my way. Of course, who would work for $.25 per hour? No one!!!

    “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.'” –Ronald Reagan

  • Dave Lalonde says:

    I wouldn’t know what side to favor considering how there are so many pros and cons about the subject. Although I do agree that raising the minimum wage would be beneficial in some aspects to our society, I do believe that it will eventually cause more unemployment and put us at an even more struggle.

    • David Ning says:

      It is a complicated subject Dave. Perhaps the answer is with increasing the Earned Income Tax Credit, as Emily discussed. At least this way our economy is paying less to get the same benefit!

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