Are minimum wages good for the economy?

A minimum wage is a limit on how little you can legally pay someone to work. Most countries have a national minimum wage, and cities or regions often set minimum wages higher than the national minimum.¹ Economists have been fighting about minimum wages for over 100 years.² One camp says minimum wages pose a nasty trade off: wages go up for some workers, but other workers lose their jobs. The other side thinks minimum wages can help all workers, with businesses footing the bill.

The argument against minimum wages is pretty straightforward: minimum wages makes employing workers more expensive, without making workers more valuable. Business faced with costlier workers could just decide to make do without as many employees. Over longer periods of time, business may even try to replace some workers with machines or move to places without minimum wages (or lower minimum wages). In this view, minimum wages are nice for the workers who get a raise and keep their jobs, but are a big problem for workers who are let go (or can’t find jobs in the first place). Overall, the minimum wage can be a drag on the economy, as there are fewer people working.

The other side starts by arguing that businesses typically have a good deal of power over how much they pay their workers—especially low wages workers who are often not protected by unions and face steep competition for jobs. This lets businesses pay workers less than the value they bring to the company (economists call this worker’s marginal product of labor). When this is the case, government’s can actually increase the cost of workers (with a minimum wage) without pushing labor costs high enough that business will want to stop hiring. Instead, the minimum wage will cut into business’s profits. Supporters of the minimum wage also argue that minimum wages can have positive ripple effects: more money in workers’ pockets means more spending and more economic activity overall.

For decades, both camps yelled they were right, but it wasn’t until relatively recently that anyone tried to really run the numbers. As you might imagine, both sides have managed to find data that shows that they are right. But over the years the debate has tended towards showing that job loss effects from minimum wage increases are pretty small, although they can be disproportionately worse for young people.³

It’s also good to remember that the debate isn’t simply for and against; there are a lot of economists who like minimum wages but might think they can be set too high, and many economists who argue against minimum wage increases who would acknowledge that some basic minimum is okay.