How the Minimum Wage Impacts Unemployment

Ever since the federal minimum wage was established in 1938 at 25 cents an hour, politicians have debated whether it's good or bad for overall employment. Today, that debate often centers on proposals to raise the minimum wage, which is currently $7.25 an hour at the federal level.

Advantages and Disadvantages of a Higher Minimum Wage

On one side of the debate is the argument that if workers are paid more, employers will hire fewer of them: A higher minimum wage—while good for some workers— would have a negative effect on total employment, with fewer jobs to go around, especially for the low-skilled. Higher wages would also eat into profits, hurting both employers and, in the case of publicly held companies, their shareholders.

On the other side, there's the argument that any increase in pay would not only put more money in workers' pockets but also give a boost to consumer spending and benefit many of those very employers. Plus, employers would be able to retain employees for longer and save on the cost of hiring and training new ones.

In addition, higher minimum wage advocates contend that the minimum wage needs to rise considerably just to keep workers and their families out of poverty and avert the personal and societal problems that poverty is known to cause.

How Much Is the Minimum Wage Today? 

The federal minimum wage of $7.25 an hour has remained unchanged since July 2009. That works out to $290 for a 40-hour week and $14,500 for a 50-week year.

As an annual salary, that's $910 over the federal poverty level of $13,590 per year for a one-person household in every state but Alaska and Hawaii, where the poverty level is set higher. For a two-person household, the poverty level is $18,310. So, for example, a single mother with one child who works full time for the federal minimum wage is earning less than $3,810 of a poverty-level income.  

For people who make the minimum wage for a brief period but later move on to better-paying work—the classic example is teenagers in fast-food jobs who live with their parents—the low minimum wage may not be a major problem; however, for people with little expectation of higher-paid work, it's a significant issue.

States, Cities, and Counties Set Their Own Minimum Wages

Fortunately for many workers, 30 states plus the District of Columbia mandate minimum wages that are higher than the federal minimum. As of 2022, they ranged from $9 an hour in Nebraska to $15.20 in Washington, D.C. Some states, such as California, have varying minimum wages depending on the number of employees.

The remaining states either match the federal level of $7.25, have no minimum wage at all, or set their level below the federal one—$5.15 in the case of both Georgia and Wyoming. In states with no minimum wage or a lower one, the federal minimum wage applies to most workers.

In 2022, 26 states are raising their minimum wages. As of Jan. 1, 2022, 22 of these states implemented the increase.

Some cities and counties—57 in all, as of Nov. 24, 2021, according to the UC Berkeley Labor Center—have also established their own minimum wages. For example, Chicago's minimum wage is currently $15 for employers with 21 or more workers, compared with $12 for the state of Illinois.

In many of these states, cities, and counties, the minimum wage is scheduled to rise automatically in future years. For example, Florida residents voted in November 2020 to increase the state's minimum wage incrementally (beginning at $10 per hour on Sept. 30, 2021 and going up $1 each year on that date) until it reaches $15 per hour in September 2026.

Some Employers Are Also Establishing Minimum Wages

Apart from what legislators are doing, some large employers have taken it upon themselves to establish company wide minimum wages in recent years. Those include big retailers such as Amazon (average of $18 per hour), Costco ($17), and Walmart (an average of $18 or higher for total compensation and benefits, depending on the location and position).

Hourly wages are, of course, only part of the equation. Another factor is hours of work. If an employer raises its workers' wages but cuts back on their hours—as anecdotal reports suggest some employers have—workers may see little or no benefit on payday.

What Would a National $15 Minimum Wage Mean?

There have also been initiatives in Congress to raise the federal minimum wage. The Raise the Wage Act of 2019, for example, would increase the level in a series of steps until it reached $15 in 2025. In subsequent years it would be indexed to keep pace with median wage growth. The bill passed the House in July 2019 but was not passed by the Senate. 

How would such an increase affect overall employment? The nonpartisan Congressional Budget Office (CBO) examined that question in a report published in July 2019 titled "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage." It predicted what would happen if the minimum wage were raised in annual increments from 2020 to 2025, at which point it would reach either $10, $12, or $15.

• A $10 minimum—According to the CBO's projections, the $10 minimum wage would raise earnings for up to 3.5 million workers and "have virtually no effect on employment." Nor would it have an appreciable impact on the number of people in poverty.
• A $12 minimum—The $12 minimum wage would benefit up to 11 million workers while reducing overall employment by an estimated 300,000 jobs. The number of people whose annual incomes fell below the poverty threshold in 2025 would be reduced by 400,000.
• A $15 minimum—Finally, the $15 minimum wage would benefit up to 27 million workers but cost an estimated 1.3 million jobs. At the same time, a similar number of people (1.3 million) would see their annual incomes rise above the poverty threshold.

So, in the CBO's judgment, raising the minimum wage up to a certain point doesn't result in greater unemployment, but beyond that point, higher wages could mean fewer jobs. The tricky part, of course, is determining just where that point is.

Perhaps not surprisingly, think tanks across the political spectrum have drawn their own conclusions from the CBO report while also disputing some of its estimates. The conservative American Enterprise Institute, for example, maintains that the CBO "overstates the poverty-reducing effects" of a $15 minimum wage, while the progressive Economic Policy Institute says the report "substantially overstates the costs" in terms of job losses. 

The Bottom Line

Raising the minimum wage has positive impacts, such as bringing people out of poverty and increasing income for individuals and families; however, increasing the minimum wage can also lead to increased unemployment, depending on the wage increase, because employers would seek automation as opposed to hiring workers.

Determining the right minimum wage increase that benefits larger parts of the population while keeping unemployment static is the key goal.