Question

A Wall Street Journal (April 8,2014) article noted that a study by the U.S. Congressional Budget Office "estimated raising the minimum wages to $10.10 an hour would reduce U.S. employment by 500,000 but lift 900,000 Americans out of poverty." Why might raising the minimum wage reduce employment? How would it raise some people out of poverty? What effect might these estimates have on a normative analysis of the minimum wage?

Answer 1

Raising the minimum wage has both positive and negative effects on employment.

Talking about the negative effect first, if the minimum wage is increased, employees will remain comfortable in their jobs and the company-switching ratio may decrease. This can have an impact on generation of job positions in the company. If the employee is sticking to his job, demand for the job in the market would decrease, thereby reducing employment.

Let’s now focus on the positive attribute. Increasing the minimum wage will lead to higher payroll costs. Employer, trying to keep these costs at a minimum, will think about outsourcing work and thus increases job avenues. The increase in job avenues will improve the standard of living of people and lift them out of poverty.

In this case, the normative analysis of minimum wage will become important to understand the trade-off between the rise of minimum wage to reduction in employment.