President Obama recently said in his State of the Union that Congress should do whatever it takes to increase the federal minimum wage to $9/hour. This caught a lot of folks on both sides of the aisle off guard because the stated priority of both parties is currently job creation. And the conventional economic wisdom states that if you increase the wage that employers have to pay their workers, they will simply hire fewer workers. Increasing the minimum wage leads to an increase in unemployment.
The counterargument to this is that increasing the minimum wage would give low-income workers more purchasing power, serving as an indirect economic stimulus without government spending. The increases in unemployment take effect only if the minimum wage is drastically increased – modest increases have little if any effect on employment.
As Paul Krugman pointed out last Sunday in the NY Times, setting minimum wage at “$20 an hour would create a lot of problems. But that’s not what’s on the table. And there are strong reasons to believe that the kind of minimum wage increase the president is proposing would have overwhelmingly positive effects.”
Employment is not the only factor at play. Low paid workers are more likely to quit and hop around between jobs. This also means that companies must suffer gaps in productivity following worker departures and constantly retrain new employees. According to John Schmitt, Senior Economist at the Center for Economic Policy and Research, even modest minimum wage increases lead to “reductions in labor turnover (and) improvements in organizational efficiency”. Companies are more likely to invest in employees that will stick around.
Saying minimum wage laws lead to unemployment is overly simplistic and not a fully formed thought. At the end of the day, it is bad economic policy to have a system in which a person working full time must live in poverty.