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The Minimum Wage: A Critical Policy Discussion

Key Question: The minimum wage hasn’t changed since 2009. Yet, people continue to push for it to be increased. Why?

Thesis: As simple as it may seem to increase the minimum wage from $7.25 to $15, it’s incredibly unclear as to the potential repercussions from doing so. The potential positive and negative externalities associated with such an increase could result in a net positive, or could continue to perpetuate the problem.

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A Complex, Unsatisfying Conclusion

The literature surrounding minimum wages is incredibly complex. However, there are some key messages that can be found throughout the following discussion.

1. The status quo does not seem to be the optimal solution

In a bold manner, it could be hypothesized that the United States, at least ever since the passage of the Fair Labor Standards Act in 1938 and perhaps for many years, if not decades, before that, has failed to provide an adequate policy addressing the wage issues in our economy.

Granted, over time these wage issues have changed in depth, complexity, and population impact, yet, no matter when you look, a wage issue has existed at some point and in some form. This issue persists today.

A majority of Americans believe that there is an issue with the current wage system in the United States. However well-intentioned, previous solutions to address this issue seem to have failed in their attempts or have fallen short of their intended goals, with only marginal improvements, if any, being seen through these collective actions.

Previous failures aside, it is not out of place to suggest that the current status quo regarding the federal and state minimum wages in the United States does not seem to be the optimal system for which American’s minimum wages are to be determined.

2. There isn’t an easily identifiable solution, yet sometimes it’s more difficult to identify the problem

Parties diverge in their views on whether the minimum wage should be just that, a minimum, or something more, such as a “livable wage”, a “poverty-alleviating wage”, or even a “productivity-based wage”.

As such, each group proposes their “solution” to what they see as the “problem”. For instance, for groups that believe the problem is that the productivity of workers has steadily increased over time and as such, the minimum wage should increase with this gain in productivity, yet hasn’t, a solution could be to append the minimum wage growth to growth in worker productivity. Or maybe the solution would be to mandate that each worker is paid a commission based on what incremental profit they bring to the firm.

For every problem, there are hundreds of solutions, yet, the minimum wage argument often is seen as a variety of different problems. How does an entire country come to a solution when it’s increasingly difficult to form a broad consensus identifying the core problem being addressed (if there is just one core problem here)?

3. A solution could have both positive and negative effects

The majority of research on the minimum wage and its potential increase has proponents and opponents on either side. In some data, the effect of the minimum wage increase is positive. For others, it is negative. And still, in others, it is inconclusive.

It’s unclear as to the true effect of a minimum wage increase as historical examples are filled with inconclusive evidence, all dependent on very specific cultural, regional, and population demographic factors.

Given this data and the lack of one clear solution, any solution enacted could have unforeseen adverse effects on unintended populations. These effects may be positive or negative—it’s incredibly hard to predict. Unfortunately, it seems, the solution may require an implementation of trial and error.

4. The summation of the current paradox

If problems exist that the current system does not properly address, it seems as though a different solution is necessary. Yet, the myriad of solutions proposed don’t signal a clear consensus across policymakers and economists. Furthermore, the research tells us that any change in the existing system will A) not necessarily solve the problem we’re interested in solving and B) will potentially have other unintended externalities (some positive and others negative).

So, how do we approach this incredibly complex issue?

The solution will be multifaceted, targeted at specific populations and groups, continually monitored, flexible, gradual, and at many times, experimental in nature.

This is not a simple binary issue of “raise” or “not raise”, but a nuanced challenge requiring sophisticated, multi-dimensional thinking. The approach to this issue most likely involves a multi-pronged strategy that doesn’t rely solely on the minimum wage adjustment.

A comprehensive analysis to determine underlying conditions needs to be performed. Wage issues are often a symptom of broader economic structural challenges. Researchers must conduct very granular, region-specific economic research as the underlying causes differ based on specific regional factors such as family breakdown, number of startups, etc.

The solution may be a form of targeted policy intervention. For instance, complementary policies could be expanded such as the Earned Income Tax Credit, workforce development and skills training programs, localized economic development strategies, educational reforms to increase human capital, etc. Economic policy frameworks should be flexible and continually adjusted based on consumer, business, and economic feedback.

Whatever the solution may be, the implementation should be gradual and experimental in nature. Policymakers should use robust monitoring and evaluation mechanisms, developing clear metrics for success beyond simple economic statistics like wage numbers and the employment rate.

A broad economic lens should be used to create, evaluate, and implement these policy changes. Wage policy is part of the larger economic ecosystem, and should be viewed as such, not just as an isolated issue with no conjoining parts. This tunnel vision has historically led policymakers to oversimplified, one-dimensional solutions which, as we’ve seen in the previous decades, have not necessarily “solved” the issues they were meant to address.

Background and Introduction

The minimum wage is the lowest amount of money that employers are legally required to pay workers for their labor, usually set per hour of work. It's designed to ensure that workers receive a fair baseline income for their time and effort, helping to reduce poverty and protect against exploitation in the workplace.

In 2024, almost every country has a minimum wage. Some countries have a universal minimum wage which is fixed across the entire economy, whereas other countries have minimum wages that differ across sectors and types of workers.

Typically, the minimum wage is set by governments (national and/or regional) and revised over time to reflect ongoing labor and business trends.

The Moral Argument for A Minimum Wage

The International Monetary Fund states, “Minimum wages have been justified on moral, social, and economic grounds. But the overarching objective is to boost incomes and improve the welfare of workers at the low end of the ladder, while also reducing inequality and promoting social inclusiveness. Critics counter that rather than improving welfare, minimum wages are counterproductive because they disrupt the labor market. They argue that there are other, better-targeted, and less distortionary ways to provide social assistance”.

The original rationale for minimum wages was motivated as a way to stop the exploitation of workers in sweatshops as their employers were thought to have unfair bargaining power over them. Over time, minimum wages have slightly transitioned to be seen as a way to help lower-income families in these countries.

The Origins of the Minimum Wage

Historians argue that minimum wage laws trace their origin to the Ordinance of Labourers, enacted in 1349 by King Edward III, which set the maximum wage for laborers in medieval England. Why did they need a maximum wage threshold?

King Edward III, a wealthy landowner, was dependent on serfs to work his land. In 1348, the Black Plague killed many serfs in the land. This severe shortage of labor caused wages to soar, pushing King Edward III to set a wage ceiling.

As time passed, the entities that were setting the maximum wage also began to set formal minimum wages. This was formalized by the Act Fixing a Minimum Wage in 1604 by King James I—later to be repealed in the 1800s.

After this, the next global attempt in the modern age to implement a minimum wage occurred in Australia, specifically in the state of Victoria in 1896. The government established wage boards tasked with establishing minimum wages in trades that suffered from unlivable wages.

The first federal minimum wage in the United States was the National Industrial Recovery Act of 1933 under President Franklin D. Roosevelt’s presidency. This was a US labor law and consumer law that authorized the president to regulate industry for fair wages and prices that would stimulate economic recovery during the Great Depression (1929 - 1939). During this time, around 25% of workers were unemployed, people lost their life savings due to bank failures, and many consumers struggled to secure housing and food. However, this law was later found to be unconstitutional.

The following attempt to pass a minimum wage law was successful. The 1938 Fair Labor Standards Act established a federal minimum wage of $0.25/hour (equivalent to around $5.40 in 2023). Over time, the minimum wage has increased from $0.25/hour in 1938 to $7.25/hour in 2024 with the broad goal of generally keeping pace with increases in the cost of living (although this is a further debate).

When the minimum wage was first introduced, many of the industries that were exempted from a minimum wage were also industries that Black workers were heavily represented in. As amendments were made to the Fair Labor Standards Act, the coverage of workers was expanded over time. More detail on this expansion and its effect is in the research section below.

The graph below shows how the federal minimum wage has changed over time:

Over this time period, individual state governments have decided to pass additional, supplementary minimum wage laws that increased the minimum wage in those states.

The 2024 minimum wage in each state is shown on the following map:

In some states, especially those in which the cost of living is higher (California, Washington, New York, Massachusetts), the minimum wage is generally higher than in other states (where the cost of living is usually lower). However, there is no requirement that the states have any minimum wage other than the federal minimum wage.

A Discussion on Public Policy in the Modern Age

In 2023 (and in many other years since 2009), independent senator Bernie Sanders proposed the Raise the Wage Act, amending the Fair Labor Standards Act of 1938 with the following:

“(A) $9.50 an hour, beginning on the effective date under section 7 of the Raise the Wage Act of 2023; (B) $11.00 an hour, beginning 1 year after such effective date; (C) $12.50 an hour, beginning 2 years after such effective date; (D) $14.00 an hour, beginning 3 years after such effective date; (E) $15.50 an hour, beginning 4 years after such effective date; (F) $17.00 an hour, beginning 5 years after such effective date”

To paraphrase, if enacted on January 1st, 2023, the minimum wage would be raised from $7.25/hour in 2022 to $9.50/hour in 2023, to $11.00/hour in 2024, $12.50/hour in 2025, $14.00/hour in 2026, $15.50/hour in 2027, $17.00/hour in 2028, and would further increase after 2028.

The detailed breakdown above is for the federal minimum wage increase for those who are currently provided the $7.25/hour minimum. As the minimum wage is incredibly broad, it’s easier to detail which groups have different provisions under this law (see below):

• Tipped employees are covered under Section 3 of the law.
• Newly hired employees under the age of 20 are covered under Section 4 of the law.
• Employees with disabilities are covered under Section 6 of the law.

This Act doesn’t need explicit government funding to enact as it is the legal responsibility of businesses to pay their employees, so this act is funded solely by businesses with employees.

This Act, if passed, would remain a law until another law regarding this subject is enacted to change or amend this law.

Rationale for the Proposed Increase

Many proponents of this increase believe the minimum wage, as it hasn’t been increased since 2009, has not kept pace with increases in the cost of living and inflation. The following chart from Self Credit Builder details an inflation-adjusted minimum wage:

According to this analysis, the minimum wage (in 2020 inflation-adjusted dollars) peaked in 1968 and has been below $10 since 1980. However, in 2020 inflation-adjusted dollars it has stayed between ~$7.50 and ~$10 for the last 40 years.

This isn’t the only evidence presented for this argument.

The United States Bureau of Economic Analysis and other government agencies came together to build the following chart:

This analysis shows the house price index and the consumer price index (denoted by the blue line) since the late 1970s, and the federal minimum wage index during that time (denoted by the red line).

As you can see, the price of houses and other consumer goods has increased significantly in the last 50 years, approximately doubling since the late 1970s. However, the minimum wage index has only remained steady, failing to increase as the cost of living has increased (here we’re using the house price index and the consumer price index for the cost of living, however the actual cost of living may be even higher).

Yet, there are other ways you could compare the minimum wage over time. Aaron H, a writer on Medium, compiled the chart below:

Authors Note: This data is unverified and comes from an unreliable source, yet it provides valuable insights. In an official scenario, this data would be collected from official sources and analyzed directly by researchers.

This chart integrates publicly available data from various government agencies to show how the GDP has grown over time, and how the minimum wage (as a % of GDP) has shrunk as GDP has grown.

The trend seems to signify that as the United States as a whole is getting richer, the percentage of that growth allocated to minimum wage workers is decreasing over time. This chart (and others) lead to arguments related to the vast wealth and income inequality in this country over time, a discussion very closely related to the discussion of minimum wage increases.

In another analysis, Statista details the minimum wage over time and its comparison to the growth in productivity in the United States:

The productivity of individual workers since 1968 has significantly grown. That is to say that workers have produced an increasing amount of profit for businesses over time.

Yet, the minimum wage these workers are being paid hasn’t increased as they have become more productive. This means they are generating more profit and creating more value, yet they aren’t being compensated for these increases in profit/value.

And finally, another analysis by Statista details how the minimum wage should be adjusted due to the various living expenses of each respective state:

This chart suggests that there exists a gap in each state’s minimum wage (whether that be the federal minimum wage or a state-specific minimum wage) and the cost of living in that state of at least $2.84/hour and upwards of $10.47/hour.

In general, states that only had the federal minimum wage (and not an increased state-specific minimum wage) experienced above-average gaps between the minimum wage and the cost of living in that state.

Minimum Wages Across the World

The Pew Research Center studied 197 countries across the globe to determine how they set and adjusted their nationwide minimum wages. The following chart details some of their initial findings:

In at least 115 countries (denoted in green), the central government is responsible for setting minimum wages through regulations, official orders, or by governmental decree. In 15 countries (denoted in blue), the minimum wage is set by a commission of worker’s representatives, government officials, and various other groups. In 15 countries (denoted in red), the minimum wage is set by nationwide collective bargaining between unions and employer organizations.

A major finding in the study is that the United States, unlike many other countries, has no legal requirement to periodically review and adjust its minimum wage. Of the 197 countries studied, at least 80 had an explicit requirement to revisit them every 1-2 years.

Population Surveys

The Pew Research Center surveyed over 5,000 United States adults in 2021 through a national, random sampling of residential addresses (weighted to be representative of the US population by gender, race, ethnicity, partisan affiliation, education, and other categories).

The survey found that around 62% of adults were in favor of raising the federal minimum wage to $15/hour. A large portion of the population, around 71%, said the federal wage should be increased (whether that be to $15 or something above or below that).

Around 54% of those surveyed said leaders should focus on passing an increase to the wage even if that increase may not be $15/hour. Around 43% said the priority should be to work to raise the hourly wage directly to $15 all at once.

The following graphic shows the breakdown by demographic:

Arguments For and Against a Minimum Wage Increase

Inequalities Addressed By Minimum Wage Increases

A minimum wage increase often aims to address a variety of economic and social inequalities, such as income inequality, racial and gender wage disparities, working poverty, economic mobility, generational inequality, and regional economic disparities. However, we’ll see in the research section below that the minimum wage often fails to address these inequalities.

By raising the lowest possible legal wage, minimum wage increases can help reduce the income gap between low-wage workers and higher-income earners. This is especially important for workers in industries that traditionally pay lower wages such as retail, hospitality, restaurants, and other service sectors.

Minimum wage increases can disproportionately benefit minority and female workers who are more likely to be concentrated in low or minimum-wage jobs. These workers have historically experienced systematic wage discrimination (whether intentional or unintentional). A higher minimum wage can help narrow these gaps.

In many states and regions, the minimum wage is not sufficient to keep workers and their families above the poverty line. A minimum wage increase can help lift working families out of poverty by ensuring that people in full-time jobs can have enough income to cover basic living expenses. Critics often argue that an increase in minimum wage will increase the cost of living, potentially negating this effect (more on this later).

Higher minimum wages can provide workers with more financial stability, potentially allowing them to invest in other, tertiary wants/needs (education, training, etc.) that can help them advance their careers and economic prospects.

Minimum wage increases, especially in the United States, can help address the economic inequalities between different regions, particularly in areas with higher costs of living where low wages create significant economic challenges.

Professor Arin Dube at the University of Massachusetts-Amherst found that among those earning less than $10/hour, only 12% were teenagers in 2011 as compared to 26% in 1979 (in class lectures 16 & 17). This signals that it’s not just teenagers who are earning the minimum wage, it’s a growing share of adults over time.

Arguments For a Minimum Wage Increase

Higher wages are often cited to stimulate economic growth. For instance, higher wages increase consumer spending power, as lower-income workers tend to spend a larger proportion of their income immediately in local economies.

Higher wages are often cited to help workers become less reliant on government welfare programs. This potentially reduces the taxpayer burden of supporting working families through public assistance. With a higher minimum wage, some workers could achieve basic financial stability without supplemental support.

Higher wages have often been cited to address income inequality, providing a livable wage that reflects actual living costs. This can help narrow wage gaps, particularly for members of historically marginalized communities. Higher wages could also improve mental and physical health by reducing financial stress.

Higher wages are often cited to increase workforce productivity as better-compensated workers tend to be more motivated and engaged.

Increasing the minimum wage can create an anchoring effect that gradually pushes wages higher across multiple job levels. When the lowest wage tier increases, it can create upward pressure on wages for positions above minimum wage as employers typically will want to maintain wage differentials. This ripple effect can extend through multiple wage brackets, as workers and employers recalibrate compensation to reflect the new baseline.

Many believe there needs to be a correction in the market where wages can keep pace with inflation and productivity increases. This can help align worker compensation with economic realities, correcting market failures that suppress wage growth.

Arguments Against a Minimum Wage Increase

According to the principles of supply and demand, if the price of wages increases, the demand for wages (workers) will decrease. Put practically, if an employer does not believe a worker generates value equal to or greater than the new minimum wage, they will not retain that worker, so in the short term, if the minimum wage was increased, it’s plausible that unemployment would increase.

A higher wage may disproportionately affect small businesses as they struggle to absorb the increased wage expenses. Overall, increased labor costs could reduce business profitability.

Higher wages are often cited to increase prices overall due to a cost pass-through. This has the potential to negate wage increases through an increased cost of living.

Higher wages may discourage hiring entry-level and younger workers, potentially reducing opportunities for workers with limited skills or experience.

Higher wages may have an uneven economic impact. Increases in the minimum wage might have different effects in urban and rural areas. There is potential for more significant economic disruption in areas with lower costs of living. Some argue that a one-size-fits-all approach might not account for regional variations (another argument for individual state minimum wage laws).

A Convoluted Set of Analyses

There are hundreds, if not thousands, of research articles on the minimum wage. Unlike other sectors with this volume of research, the findings are not always clear. Some of the most prevalent studies are detailed below:

Effect of Minimum Wage on Employment & Jobs: Inconclusive (2 positive, 4 neutral, 7 negative)

Studies have found that the minimum wage increases job creation and overall growth of jobs in the economy. In addition, studies have found that the minimum wage removes most low-paying jobs which forces workers to train for and move to higher-paying jobs. Another set of studies found that a minimum wage increase can reduce the number of hours worked by workers and could reduce the number of jobs in an economy.

Along with this, another study found that an increase in the minimum wage can slow the creation of low-skilled jobs. Furthermore, a minimum wage increase can result in jobs moving to other areas or other countries with lower-cost labor.

Throughout the research, there seems to be a growing consensus that the change in employment caused by an increase in the minimum wage is close to zero, with commentary suggesting that more vulnerable groups (such as minorities, young workers, and low-skilled workers) may be harmed due to this increase.

In 1994, economists David Card and Alan Krueger studied the employment trends among 410 restaurants in New Jersey and Pennsylvania following New Jersey’s minimum wage increase of $4.25/hour to $5.05/hour in 1992. They found “no indication that the rise in the minimum wage reduced employment.” (in class lectures 16 & 17). However, a 1995 analysis by David Neumark found this increase resulted in a 4.6% decrease in unemployment. The difference? Neumark’s study was based on payroll records whereas the Card-Krueger study was based on business surveys.

In 2007, a literature review by David Neumark and William Wascher found that (in credible research) 85% of studies showed a positive correlation between minimum wage hikes and increased unemployment.

A study in 2012 by Joseph Sabia estimated the 2004 through 2006 New York minimum wage increase from $5.15/hour to $6.75/hour on the employment rate. The study found that the minimum wage increase resulted in a ~20% reduction in employment for less-skilled, less-educated workers.

A 2019 study on minimum wage changes in various states between 1979 and 2016 found that an increase in the minimum wage had no impact on the overall number of low-wage jobs.

A 2019 study by the Congressional Budget Office estimated the potential effects of a minimum wage increase. If the wage were to increase to $15 by 2025, up to 27 million workers could see an increase in their average weekly earnings. However, 3.7 million workers could lose employment.

A recent survey by Greg Mankiw found that 79% of economists agreed that “a minimum wage increases unemployment among young and unskilled workers.”

Effect of Minimum Wage on the Foreign Investment: Positive

A 2024 analysis by Paruch, Sanetra, and Tomanek detailed how Poland’s minimum wage increases since 2019 had impacted their economy. Poland’s monthly minimum wage has increased from ~$560 in 2019 to ~$1,060 in 2024. In 2023, foreign direct investments in Poland reached an all-time high, growing 23% YoY. However, it is important to note that even though the minimum wage has almost doubled over the last 5 years, it only amounts to around $6/hour, a competitive rate as compared to other countries.

Effect of Minimum Wage on Employee Welfare: Inconclusive (2 positive, 1 neutral, 1 negative)

A minimum wage increase could have a neutral or negative effect on worker’s welfare. Employers may not comply with the minimum wage increase in full, for instance, employers may give workers under-the-table supplements to evade taxes or employers may underreport the number of hours employees worked, leaving their pay unchanged. Employers may offset higher minimum wages by reducing employee benefits or laying off workers to cut costs.

To quote the International Monetary Fund, “Research spanning several decades has not settled the debate. Some studies find that the minimum wage has significant benefits for workers; others conclude that it is harmful. Many studies have been inconclusive.”

Studies have found that the minimum wage encourages people to get an education, resulting in better-paying jobs.

A 2019 study found that raising the minimum wage by $1 might have prevented more than 27,000 suicides. A $2 increase could have prevented more than 57,000 suicides.

Effect of Minimum Wage on Poverty: Inconclusive (2 positive, 2 negative)

Studies have found that the minimum wage raises family incomes at the bottom of the income distribution and lowers poverty. Another set of studies found that the minimum wage alone is not effective at alleviating poverty and actually produces a net increase in poverty due to unemployment increases.

A 2017 study by Arindrajit Dube found that higher minimum wages lead to increases in incomes among families at the bottom of the income distribution and that these wages reduce the poverty rate (a 10% increase in the minimum wage was associated with a 5% reduction in the nonelderly poverty rate).

A 2002 study by Richard Vedder found that minimum wages have had little or no effect on poverty in the United States. In addition, there is evidence that minimum wages occasionally increase poverty.

Effect of Minimum Wage on Businesses: Inconclusive (1 positive, 1 negative)

Studies have found that the minimum wage has a positive impact on small business owners and the small business industry. Another set of studies found that the minimum wage excludes ultra-low-cost competitors from labor markets and prevents them from reducing wages during economic downturns.

Effect of Minimum Wage on Technology Development: Positive

Studies have found that the minimum wage increases the rate of technological development as labor costs are higher, making technological efficiencies more appealing and cost-effective.

Effect of Minimum Wage on Prices: Negative

Studies have found that increasing the minimum wage can cause an upward wage-price spiral where wages and prices continue to increase in perpetuity. Another set of studies found the minimum wage can result in higher consumer prices for products and services produced primarily by minimum-wage workers.

In 2007, the Federal Reserve Bank of Chicago found that restaurant prices rose in response to minimum wage increases, however, this was only around 0.4% of the original price.

A 2020 study found that a 10% minimum wage increase for grocery store workers resulted in a 0.36% increase in grocery prices (full cost pass-through).

A 2021 study covering over 10,000 McDonald’s restaurants in the United States found that during 2016-2020, a 10% minimum wage increase for workers was passed through to customers as a 1.4% increase in the price of a Big Mac.

Effect of Minimum Wage on Employees: Inconclusive (1 positive, 2 negative)

Studies have found that the minimum wage can result in the exclusion of certain groups from the labor force, potentially marginalized communities and groups. Another set of studies found that a minimum wage discourages further education among the poor by enticing people to enter the job market.

A 2021 study on the expansion of the Fair Labor Standards Act in 1966—extending the minimum wage to cover several economic sectors where nearly a third of all black workers were employed—found that the minimum wage expansion led to an increase in earnings for the newly covered workers, substantially reducing the racial wage group, all without any adverse aggregate effects on employment.

A Look Towards the Future

Claude, the generative AI platform by Anthropic, summarizes the complexity of this entire issue well:

“The key to this discussion, and those that follow, is to maintain intellectual humility. We must acknowledge that complex socioeconomic challenges rarely have simple, universal solutions. Continuous learning, adaptive policymaking, and a willingness to modify approaches based on emerging evidence are crucial”.

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That’s all for today. I’ll be back in your inbox on Saturday with The Saturday Morning Newsletter.

Thanks for reading,

Drew Jackson

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