Does Raising the Minimum Wage Increase Unemployment?

Photo: nicksarebi

Conventional wisdom holds that instituting or raising the minimum wage will increase unemployment. But a recent paper by Jeremy Magruder, an economist at Berkeley, finds the opposite effect. Magruder examines the case of Indonesia in the 1990s, “where real minimum wages rose rapidly in a varied way and then dropped quickly with the inflation rate in the South East Asian financial crash.” Here’s an excerpt:

When minimum wages rose in one district relative to their neighbors, that district observed an increase in formal sector employment and a decrease in informal employment. It also observed an increase in local expenditures, which is consistent with the hypothesized mechanism of the big push: that local product demand increases labor demand. Moreover, this increase was only observed in local industries which can be industrialized and do supply local demand, supporting the model further. Tradable manufacturing firms saw no growth in employment, and un-tradable, but non-industrializable services saw an increase in informal employment.

Of course, few modern-day economists argue that an increase in the minimum wage will actually create jobs in America, and such policies failed dismally during the Great Depression. Magruder explains why the policy may have worked in Indonesia, but not in Depression-era America:

One, as a less-developed country receiving substantial foreign investment, Indonesia may have had new access to potential, unadopted, and profitable technologies that simply needed a market. A second is that much of the 1990s were a time of growth in Indonesia, when sticky wages may have limited wage growth (the opposite of conditions in the depression). Finally, Harrison and Scorce (2010) show that anti-sweatshop activism also raised labor standards in foreign firms without an accompanying drop in employment. This indicates that wages may have indeed been below marginal products in the 1990s, reducing coordination and creating an opening for policy.

(HT: Chris Blattman)


You need to brush up on "conventional wisdom" because it's more a political statement than one backed by data. A bunch of papers have attacked the mechanical idea that lifting the minimum wage costs jobs. One reason is the minimum wage trails the prevailing wage anyway. In terms of data, a nice paper looked at county by county data along state lines to isolate as much as possible the effects where the minimum wage was raised. It found no decrease in jobs.


yeah, i agree- any statement beginning with, "of course, few modern-day economists argue..." is a rhetorical cover for lack of substance- bottom line is that poor people spend $ when they get it, and the minimum wage simply redistributes wealth downward after it has been redistributed upward by the exploitation of labor to increase profits


Apples and oranges. No comparison at all, really, and not controlled for the other variables like inflation. Pretty disappointed, usually freakanomics does better.


Yeah, I thought it was fairly well established that the whole "raise minimum wage -> lose jobs" was nothing more than a talking point. Every academic study I've looked at or read about has said that it isn't the case. Now, I'm not sure anyone was able to definitively say WHY the labor market doesn't follow supply & demand in this particular case, but empirically, it simply doesn't.


Every academic study you have looked at? Do you look at academic studies on this subject with your eyes closed? I mean, seriously. This is one of the most widely studied issues by economists, and there are literally dozens of studies showings its negative effects on employment, especially among teens and African-Americans. At best, the overall research is inconclusive.

No matter what, employers can not afford to employ people when they have to pay them a wage that exceeds the value of their output. If a person was producing $6 an hour in output and now they have to pay them $8, it won't be long before the person is either forced to increase their output or they will be fired (or else the company just shuts down completely).

Vince Skolny

"especially among teens and [inner city] African-Americans"

This is correct but, frankly, I suspect many people would prefer wage floors for older white folks than jobs for teens and blacks. Hence, it doesn't cost jobs. . . at least not for people that matter.

Randall Hoven

It should say something that a guy has to focus on Indonesia in the 90s to find what he's looking for. Not enough US data? How about American Samoa?


Studies like that certainly increase employment in the data mines...


In a place like Indonesia where there is such a large informal sector, intuitively it makes sense that the jobs in the informal sector could truly compete with those in the formal sector. Generally a raise in the minimum wage leaves businesses with the ability to employ less labor given the same overall budget, however if the labor will be employed anyway; the raise in minimum wage could allow formal businesses to compete with informal in wages and bring a greater labor demand to the suddenly more lucrative jobs in the formal sector.

Given the much smaller infrastructure of the informal sector in the US compared to Indonesia, I do not think policy suggestions taken from the Indonesian context can be applied here.

Eric M. Jones.

People don't EAT money, so raising the minimum wage generates employment elsewhere. Henry Ford figured this out.

Karl Baker (@kbaker6)

In 2010 about 2,5 percent of workers earned wages at the Federal minimum of $7.25 an hour.

It seems it's largely those individuals we'd be concerned about if the minimum wage increased (some earn less due to exemptions in the law).

Companies held to the Federal minimum are those who sell items out-of-state or have revenues in excess of $500,000, so your small mom and pop restaurant probably isn't subject to these standards.

Instead, it's the Wal-marts of our economy who are constrained by this price floor. So, would Wal-mart, for example, lay off some of it's low paid workers if the minimum wage was increased?

If it did, how would that affect its already lackluster service and, consequently, its competitiveness? Would Costco, who pays higher wages, take some of its market?

I think businesses in competitive sectors would be better off dipping into their profits to maintain the quality of their products and their market share, rather than laying off employees to avoid a small increase in labor costs. And, as we've heard so often in reports, companies are sitting on record levels of cash.

Although if Congress were to increase the wage, I would like to see them also increase the limit for the exemption from $500,000 in revenue to possibly $1,000,000.

Karl Baker



Why does it appear to be a novel idea that providing more funds at the bottom of the economy grows it more than providing funds to the top? Those at the bottom are consumers. You increase their resources, they spend them, not only increasing their standard of living but those who provide them goods and services. The statement that raising the minimum wage increases unemployment is a political meme: Demand for goods and services is increased by the increase in wages but the net cost of those goods and services is raised less. This is not difficult to understand. Easy to deny for political purposes, yes but not difficult to understand.


This may be the exception that proves the rule. Any time the minimum wage is set above market levels of course unemployment will result. If the study shows otherwise, check the data. If it still shows otherwise, check the political affiliation of the group funding the study.


I will argue that raising minimum wage is beneficial to the economy in certain circumstances. If companies are hoarding cash and not investing their profits, then paying workers more is best use of the money on a macroeconomic scale.

If companies profit margins are razor thin or if labor can be replaced easily by machines, then raising minimum wage could increase unemployment.

Whether raising minimum wage is good or bad depends on the individual circumstances of the economy. There are too many factors and incentives that you have to take into account, so you can't make overbroad generalizations.

Enter your name...

Wouldn't it depend on whether the company with the cash had any employees being paid the minimum wage?

I've been trying to remember the last time I heard of a job that paid only the minimum wage, and with the exception of part-time, low-skill work offered to full-time students on campus, I think it was about three years ago. Most places that we think of as offering minimum-wage jobs normally pay at least a token amount above the minimum wage, at least for employees who have completed their probationary period.

Kim Onisko, CPA

Proof that unreadable rants offered by illogical, non-scientific "economists" can be used to debate any issue.

A comparison of Indonesia and the United States? Regarding the minimum wage? Are you kidding? Have you been to Indonesia? (I traveled Southeast Asia in the 90's)

Somebody really needed a paper for a thesis and pulled this out from where the sun doesn't shine.

gevin shaw

New Jersey raised its minimum wage; Pennsylvania didn't. What happened to employment in minimum-wage jobs along the border? Contrary to conventional wisdom, they found "…no evidence that the rise in New Jersey's minimum wage reduced employment in the fast-food resaturants in the state."

Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania" by David Card and Alan B. Krueger.

Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply [this is a response to the fast-food chain–sponsored attack on the original paper].

Card and Krueger offer several possible explanations.

caleb b

Raise the minimum wage to $50 an hour. Then tell me what happens to employment.

Small changes might make very little differences, but if the wage people are worth gets too far out of whack, business will close or be unable to compete. For further evidence, see Detroit.


I've always wondered if there is a relationship between criminal detention (for profit), and unemployment in the related sectors?

One American's Rant

How about if we try an old idea.