What happens if minimum wage increases

At the other extreme, a large group of workers might shuffle regularly in and out of employment, experiencing joblessness for short spells but receiving higher wages during the weeks they were employed.

In analyzing the effects of joblessness on poverty, CBO used its estimates of the distribution of durations of unemployment for the — period to assign directly affected workers either no joblessness or a duration of joblessness within the projection year that was randomly chosen from that distribution. The Effects on Income. How would increasing the minimum wage affect family income? However, income would fall for some families because other workers would not be employed and because business owners would have to absorb at least some of the higher costs of labor.

For those reasons, a minimum-wage increase would cause a net reduction in average family income. How did CBO estimate effects on family income? CBO projected the distribution of family income in future years and then combined those forecasts with estimates of effects on wage rates, employment, business income, and prices. Effects on wage rates include increases in the wages of workers who would have earned slightly more than the proposed minimum wage in the absence of the policy.

That increase in productivity might occur through a variety of channels, such as a reduction in turnover. How would increasing the minimum wage affect the number of people in poverty? But low-wage workers who lost employment would see their earnings decrease, and in some cases their family income would fall below the poverty threshold. The first effect would tend to be larger than the second, so the number of people in poverty would generally fall.

How did CBO estimate effects on the number of people in poverty? CBO projected the distribution of poverty in future years using the same methods it used to project the distribution of family income, applying the same definitions of income and poverty thresholds that the Census Bureau uses to determine the official poverty rate.

Uncertainty and Other Effects. How certain are these outcomes? There are two main reasons why. First, future wage growth under current law is uncertain. If wages grow faster than CBO projects, then wages in future years will be higher than CBO anticipates, and increases in the federal minimum wage would have smaller effects.

If wages grow more slowly than CBO projects, the effects would be larger. Second, there is considerable uncertainty about the responsiveness of employment to an increase in the minimum wage.

If employment is more responsive than CBO expects, then increases in the minimum wage would lead to larger declines in employment. By contrast, if employment is less responsive than CBO expects, the declines would be smaller. Though the current federal minimum wage in the U. Another projected problem resulting from an increased minimum wage is that of potential job losses.

Many economists and business executives who point out that labor is a major cost of doing business argue that businesses will be forced to cut jobs to maintain profitability. The numbers could be substantially higher if companies made a major move toward outsourcing more jobs to less expensive labor markets outside the country. One potentially negative impact that is less readily apparent is the possibility that a higher minimum wage would result in increased labor market competition for minimum wage jobs.

The net outcome of an increased minimum wage might be a large number of overqualified workers taking minimum wage positions that would ordinarily go to young or otherwise inexperienced workers. This could impede younger, less experienced entrants to the job market from obtaining work and gaining experience to move their careers forward.

Increasing the minimum wage is expected to lift individuals out of poverty and improve work ethic, however, it also comes with many possible negative implications, such as inflation and a loss of jobs. National Conference of State Legislatures. Family Finances. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. New research shows that the pass-through effect on prices is fleeting and much smaller than previously thought. Historically, minimum wage increases were large, one-shot changes imposed with little advance notice for businesses.

But many recent state and city-level minimum wage increases have been scheduled to be implemented over time and often are indexed to some measure of price inflation. First, economists argue that too high of a government-mandated minimum wage creates an artificial floor in the labor market, which can cause distortions and inefficiencies.

A second argument is that employers, forced to pay more in wages, will end up hiring fewer workers, which can actually lead to higher unemployment because those workers who were perhaps willing to work for lower wages are not hired.

In June , the U. Federal Reserve announced no change in its rate policy and did not signal concerns about rising inflation. A week earlier, the U. With regard to inflation, so-called wage push inflation is the result of a general rise in wages. According to this hypothesis, in order to maintain corporate profits after an increase in wages, employers must increase the prices they charge for the goods and services they provide.

The overall increased cost of goods and services has a circular effect on the wage increase; eventually, as goods and services in the market overall increase, higher wages will be needed to compensate for the increased prices of consumer goods.

In theory, raising the minimum wage forces business owners to raise the prices of their goods or services, thereby spurring inflation. In reality, the relationship between rising wages and inflation is more complex: Wages are only one part of the cost of a product or service paid for by consumers. However, while this may be true in certain service sectors, it is unclear that the effect on wages would generalize to other sectors, especially when faced with competition from foreign exports using cheaper labor.

While arguments for wage-push inflation exist, the empirical evidence to back these arguments up is not always strong. Historically, minimum wage increases have had only a very weak association with inflationary pressures on prices in an economy.

For example, in , researchers from the W. Upjohn Institute for Employment Research found that "[Using monthly price series] Their research examined the effect of prices on minimum wage increases in various states in the U. It was intended to explore the magnitude of the pass-through effect and add to the discussion about how different policies may shape the effect that minimum wage increases have on prices. Their first main finding was that "wage-price elasticities are notably lower than reported in previous work: we find prices grow by 0.

On the other hand, large minimum wage hikes have clear positive effects on output prices which can ripple through to higher consumer prices. Is raising the minimum wage a good idea for the economy?