Negative Effects of Minimum Wage Increase

November 18, 2013

The minimum wage tends to be an emotionally charged topic because both sides believe that they are arguing in defense of the poor. Each side then naturally assumes that the other side must be arguing in opposition to the poor. To promote civil discussion, it is important to recognize that both sides are truly interested in helping the poor. Once we realize that we share this common purpose, we can work together to examine honestly the arguments and evidence for and against the minimum wage, says Antony Davies, a Mercatus Center-affiliated senior scholar at George Mason University and associate professor of economics at Duquesne University.

Conventional wisdom suggests some apparently compelling arguments about the benefits of a minimum wage. Such arguments, however, are based on a misconception that wages are levers that set value, rather than metrics that reflect value. Clearly, earning a higher wage is better for the employed worker than earning a lower wage. The important question is whether the trade-off -- an increased likelihood of unemployment -- offsets the increased wage.

After comparing historical changes in unemployment rates among workers of varied educational attainments to changes in the minimum wage, Davies estimates that the new increase in New Jersey's minimum wage will cause the following to happen:

  • Increase unemployment among workers without a high school education (by approximately 2 percentage points);
  • Increase unemployment among workers without high school diplomas in general (by approximately 1 percentage point);
  • And have no effect on unemployment among college-educated workers.
  • Davies found no evidence that suggests that an increase in the minimum wage will improve income equality in New Jersey.

Source: Antony Davies, "Unintended Consequences of Raising the Minimum Wage," Mercatus Center, October 25, 2013.

 

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