Raising the Minimum Wage: The Effects on Employment, Businesses, and Consumers

Despite good intentions, recent efforts at the federal, state and local levels to increase the minimum wage pose a serious threat to America’s businesses and to less-experienced and less-educated Americans as it raises the cost of doing business and negatively affects employment levels. Despite the political advantages of increasing the minimum wage, if policymakers are truly interested in helping the country’s least fortunate, they should not raise the mandated wage floor.

As the minimum wage debate is brought to state legislatures across the country, policymakers must be prepared to confront several widely-held misconceptions about the minimum wage.  Below are several misconceptions followed by the facts and data that dispute them.

For more information, please see the Exchange Council’s newest State Factor, Raising the Minimum Wage: The Effects on Employment, Businesses and Consumers.

Misconception 1 : Raising the minimum wage will lift families out of poverty.

Truth: The problem plaguing America’s poor is not low wage rates, but a lack of job opportunities. Minimum wage increases fail to alleviate poverty because they fail to address unemployment. Recent studies have shown that there is little to no relationship between an increased minimum wage and reductions in poverty.[i] These studies find that, although some lower-skilled workers living in poor families see their incomes rise when the minimum wage increases, others lose their jobs or have their hours substantially cut.[ii]

Misconception 2 : Minimum wage earners are supporting families on their minimum wages alone.

Truth: Among adults 25 and older earning minimum wage, 75 percent live well above the poverty line of $22,350 for a family of four, with an average annual income of $42,500.[iii] This is possible because more than half of older minimum wage earners work part-time, and many are not the sole earners in their households.[iv] In fact, 83.5 percent of employees whose wages would be increased by a minimum wage hike either live with parents or another relative, live alone, or are part of a dual-earner couple.[v] Only 16.5 percent of individuals who would benefit from an increase to the minimum wage are sole earners in families with children.[vi]

Misconception 3 : Minimum wage increases stimulate the economy through increased consumer spending.

Truth: Research has found no link between an increased minimum wage and economic growth. One study found that, while minimum wage increases have no effect of GDP generated by more highly-skilled industries, there may be small to modest declines in GDP generated by lower-skilled industries.[vii]

Misconception 4 : Minimum wage earners are trapped in poverty.

Truth: Minimum wage jobs are viewed by many as the first step in a long career path. Nearly two thirds of minimum wage earners gain pay raises within the first year of employment.[viii] From 1981 to 2004, the median annual growth in wages for minimum wage employees was nearly six times that of employees earning more than the minimum wage.[ix]



[i] Sabia, Joseph J., and Richard V. Burkhauser. “Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?” Southern Economic Journal. 2010. 76 (3), 594.

[ii] Ibid.

[iii] Sherk, James. “Who Earns the Minimum Wage? Suburban Teenagers, Not Single Parents.” The Heritage Foundation. February 28, 2013. Available: http://www.heritage.org/research/reports/2013/02/who-earns-the-minimum-wage-suburban-teenagers-not-single-parents.

[iv] Ibid.

[v] Employment Policies Institute. “5 Things You Didn’t Know About the Minimum Wage.” Available at http://www.epionline.org/minimum-wage/.

[vi] Ibid.

[vii] Sabia, Joseph. “Failed Stimulus: Minimum Wage Increases and Their Failure to Boost Gross Domestic Product.” Employment Policies Institute. December 2010.

[viii] Even, William and David Macpherson. “Wage Growth Among Minimum Wage Workers.” June 2004. http://www.epionline.org/studies/macpherson_06-2004.pdf .

[ix] Ibid.

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