Income Inequality: Busting a common myth about the minimum wage

This entry is part 4 of 5 in the series Inequality in America
Fast Food Burgers, photographed by Jef Poskanzer and released for public use via Wikimedia Commons.

Fast Food Burgers, photographed by Jef Poskanzer and released for public use via Wikimedia Commons.

Does an increase in the minimum wage increase unemployment? That’s one of the key arguments against increasing the minimum wage. Rather than closing the gap between rich and poor, it has the paradoxical effect of increasing unemployment because employers will choose to cut hours or hire fewer workers.

But, does this argument hold water?

The employment effects of the minimum wage have been widely studied but results are mixed and inconclusive. A recent novel study of fast-food restaurants, conducted by a team of economists, casts light on the debate. This team studied 81 fast-food restaurants over the course of three increases in the minimum wage.

You may wonder why they studied this issue among restaurants. One reason is that a lot of the national debate on minimum wage policies revolves around food-service workers. Federal records show that more than 4 million Americans now work in food service, including fast-food restaurants, and the median age of these laborers is 28. So, we’re talking about a huge number of people—and this work force is far from the stereotype of a teen-age burger flipper.

So, these researchers asked: Will raising the minimum wage for these workers also raise unemployment? Here’s what the researchers found—when hikes in the minimum wage occur:

  • The impact on the number of people employed is negligible; so is the impact on employee hours.
  • Partly, the increase in labor costs is passed on to customers through higher prices.
  • Part of the increase is absorbed by making operations more efficient, setting higher employee performance standards.
  • In part, the increase in labor costs is offset by intensifying marketing efforts to bring in new customers.
  • In bad economic times, the increase in labor costs depresses profits; in good times, it does not.

Differences in opinion about the minimum wage are less about the facts, the authors say, and more about values and ideology. Those who believe the government can and should regulate labor markets are in favor of the minimum wage. Those who believe in free markets (and a small, weak government) are opposed.

Do you support or oppose an increase in the minimum wage?

Are you surprised to learn that an increase in the minimum wage does not increase unemployment?

Could an increase in the minimum wage be a good thing because it compels businesses to be more efficient and workers to work harder?

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