How minimum wage effects unemployment

Do minimum wage hikes spur unemployment?

President Barack Obama will announce in tonight’s State of the Union speech an increase in the minimum wage for federal workers on new contracts to $10.10, up from the current level of $7.25.  Putting the constitutionality of such a plan aside for a moment, what effect will an increase in the minimum wage have on American corporations?

Newton’s third law states for every action, there is an equal and opposite reaction.  Meaning, when a burden is placed upon a business, the business reacts to appropriately adjust to the added burden in an effort to maintain standard operating procedure relative to the past.

Economists from around the world have studied how companies respond to minimum wage increases.  Several studies, like this one from the London School of Economics, found a link between higher minimum wages and unemployment.  But other studies have produced a much more complex relationship at play.

Although it can happen, companies rarely roll over and accept lower profits due to the increase in minimum wage.  The laws of economics almost always dictate some kind of response to higher wages for primarily low-skilled workers.  How do companies respond to higher wage requirements?

Some businesses are forced to lay off workers or hike their prices.  Others cut back on hours for their current staff.  Many businesses will slash benefits instead of cutting jobs.

“The last time the minimum wage went up in two steps, we tried to not raise our menu prices, but the cost of food went up a lot,” lamented Blane Beschta, owner of a small diner in Cedar Rapids, Iowa.  “People are going to say that $3 for a cup of coffee is crazy, but that’s what it’s going to take if we need to raise wages to what is being proposed”.

One piece of research suggests that for every 10% increase in the minimum wage, prices increase about 4%, hardly the mark of smart policy.

New research indicates that higher minimum wages actually reduce employee turnover, which boosts productivity and reduces the costs related to training new employees and staff.  Even so, how do minimum wage hikes effect a business’ willingness to hire new employees?  The jury is still out, and the numbers are wildly unconvincing in either direction.

One thing is certain: many businesses do react to new wage requirements for workers.  We can only hope that a nearly $3 hike in wages for low-skilled labor jobs on federal government contracts does not increase the costs of already expensive and wasteful federal programs.

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