1. The Effects of Raising the Minimum Wage
Regan McMurray The Economist
Raising the national minimum wage, which
currently is $7.25 per hour, is a topic of
contested debate amongst federal, state, and
local governments. However, before making
a decision, US Congress needs to be aware
of (a) the positive effects of a higher
minimum wage, (b) the potential negative
effects of raising the minimum wage, and (c)
an example of a city that has already
increased the minimum wage.
Positive Effects
The Congressional Budget Office (CBO)
issued a report in February 2014 outlining
some of the expected effects of a minimum
wage increase.
For low-wage workers, a higher minimum
wage intends to boost family incomes and
strengthen family purchasing power.2 The
goal is to raise individuals and their families
out of poverty. Hopefully, the results will
close the immense income-gap within the
US.
For businesses, a higher minimum wage
could result in lower employee turnover,
increased productivity, and increase
customer satisfaction.3 Walmart and Costco
are excellent examples. Costco pays its
hourly staff much more than Walmart and
while Walmart experiences nearly a 44
percent employee turnover, Costco’s is as
low as 17 percent.4 Decreasing employee
turnover is important for business because it
also decreases training costs. If a company
is able to retain more employees, then fewer
new employees need to be hired and trained.
Potential Negative Effects
First and foremost, any introductory
economics course discusses the effects of
minimum wage on labor supply and labor
demand. Figure 1 below illustrates how a
minimum wage creates unemployment.
The Effects of Minimum Wage on Unemployment
Figure 1 Raising the minimum wage results in additional
unemployment. Source: Regan McMurray5
The light gray area of Figure 1 represents
the existing unemployment at the current
minimum wage of $7.25 per hour. The dark
gray area of the graph represents the new
unemployment that will result from raising
the minimum wage. Notice how large the
dark gray area is in comparison to the light
gray area. Basic economics shows that
raising the minimum wage means creating a
significant amount of job loss.
Further, consider Company A that has only x
amount of dollars budgeted for paying their
employees. Changing the minimum wage
will not necessarily change x. Company A
has to make a decision: either dedicate more
finances towards payroll or make cutbacks.
Cutbacks can take the form of decreasing
hours, layoffs, and decreasing perks and
In the most recent State of the Union
Address, President Obama invited those in
congress unwilling to higher minimum wage
try to “work full-time and support a family
on less than $15,000 a year.”1

2. 2
benefits. Figure 2 depicts the increasing and
decreasing effects of raising the minimum
wage.
Decrease in Hours
Company A may choose to decrease
employees’ hours in order to compensate for
the increased hourly pay. Thus full-time
employees may become only part-time
employees and overtime hours will become
nonexistent.6 So despite an increase in
minimum wage, employees may receive a
similar amount of income.
Layoffs
As a result of a high minimum wage,
Company A may have to resort to layoffs.
Rather than decreasing the number of
working hours, the number of employees
may decrease. Additionally, Company A
may begin to consider replacing employee
labor with technology.7 Perhaps layoffs will
occur because an electronic device is more
cost effective.
Decrease of Perks and Benefits
Company A may choose to no longer
provide perks like free parking and free
food.8 Additionally, Company A may even
remove some benefits such as healthcare or
401K.9 While an employee may be earning
more per hour, the discontinued simple
perks and benefits come at a significant
price.
Example
Some local governments in places like
SeaTac have already raised their minimum
wage requirements.
SeaTac is a suburb of
Seattle and has raised the
minimum wage to $15.00
per hour. From SeaTac’s
experience, many
observations can be
made.
First, such an increase in minimum wage
discourages small business expansions and
results in no new businesses and no new
hiring.10
Second, “mom and pop” shops are more
affected than big corporate companies.11
For example, the Clarion hotel in SeaTac
had to close its restaurant after the minimum
wage rose; however, the 4.5 star hotel in
SeaTac is expanding and thriving.12 The
small-businesses are being adversely
affected while the large businesses easily
navigate the wage change.
Third, the newly raised minimum wage has
been going to the more educated
candidate.13 Thus the poor people of SeaTac
were not actually being benefited by the new
minimum wage.
Conclusion
In order for US Congress to make an
informed decision on whether or not to raise
the minimum wage, the positive and
negative effects need to be weighed and
considered alongside the examples of
experimental cities.
Figure 2 Increasing minimum wage may cause many adverse effects.
Source: Regan McMurray
The Potential Results of Increasing Minimum Wage

3. 3
The United States Department of Labor
(DOL) has issued a list of so-called
“minimum wage mythbusters.”14 However,
due to simple economic theory and
observations from SeaTac, some of the
DOL’s myths are contradicted. For
example, job loss will occur and
unemployment will increase.
The debate to change the minimum wage is
quite complex; however, three proposed
simplifications or solutions can aid in the
decision-making.
1. Analyze the impact of
unemployment. If the level of
unemployment is not the highest
priority of concern, then consider
raising the minimum wage.
2. Supply people with skills. The
graph discussed previously (Figure
1) depicts how raising the minimum
wage increases the amount of
unemployment. In such a situation,
the unskilled workers are unable to
compete at that level of the labor
market. Thus, empowering the poor
with skills will result in employment.
3. Slowly raise the minimum wage.
The larger the rock, the greater the
ripple. Smaller increases in the
minimum wage will have smaller
effects. A less extreme minimum
wage schedule will better help
businesses to adapt and lessen the
negative effects of a higher hourly
wage.
While many people will benefit from a
higher minimum wage, some individuals
and businesses will be disadvantaged and
harmed. If lawmakers are aware of the
negative consequences that will occur,
perhaps the worst-case scenario can be
avoided.
Endnotes
1 Barack Obama. "State of the Union 2015."
January 20, 2015.
2 "The Effects of a Minimum-Wage Increase on
Employment and Family Income." CBO. February
18, 2014. 2.
3 Ibid., 7.
4 Barry Ritholtz. "Wal-Mart's Minimum Wage
Breakdown." BloombergView. February 23, 2015.
http://www.bloombergview.com/articles/2015-02-
23/wal-mart-raises-minimum-wage-as-laws-change-
labor-gets-scarce.
5 "Minimum Wage." Wikipedia.
"http://en.wikipedia.org/wiki/Minimum_wage."
6 Tim Worstall. “We Can Predict The Effects Of
Seattle’s $15 An Hour Minimum Wage.” Forbes.
June 3, 2014.
http://www.forbes.com/sites/timworstall/2014/06/03/
we-can-predict-the-effects-of-seattles-15-an-hour-
minimum-wage/
7 Sarah E. Needleman and Angus Loten. “Can the
Tablet Please Take Your Order Now?”The Wall
Street Journal. March 27, 2013.
http://www.wsj.com/articles/SB10001424127887323
501004578386321069156006
8 Ibid.
9 Ibid.
10 Alex Bolt. “Minimum Wage Hike Backfires in
Seattle Suburb.” America’s Future Foundation. June
10, 2014. http://americasfuture.org/minimum-wage-
hike-backfires-in-seattle-suburb/
11 Ibid.
12 Ibid.
13 Ibid.
14 “Minimum Wage Mythbusters.” United States
Department of Labor.
http://www.dol.gov/minwage/mythbuster.htm