While a minimum wage increase could benefit some people, there are plenty of negative effects of this increase to consider as well. Recently, the states of New York and California approved bills that would increase the minimum wage to $15 an hour. Although this may sound like good news, a lot of employees are dissatisfied with the decision. Today, we’re going to find out why by looking at the main negative effects of minimum wage increase on the economy.
Negative Effects of Minimum Wage Increase
1. It Reduces the Number of Jobs Available for Workers with Low Skills
The first issue with increasing the minimum wage is the fact that people who have lower skills won’t find work that easily. Why? Because once the minimum wage increases, firms will try to substitute low-skilled workers with other inputs. Just to give you an example of how this could happen, let’s consider supermarkets. The cashiers don’t normally get paid that much. If the minimum wage were to increase, the supermarket owners would much rather substitute the cashiers with a self-checkout system or choose higher-skilled labor.
Of course, this decision has drastic consequences on the low-skilled workers. They might lose their job and find it increasingly hard to find a new one in another firm. As a result, their income will fall and poverty will rise. The paradox here is that a minimum wage increase should help precisely this group of people. Instead, it seems to be doing more harm than good.
2. It Doesn’t Help People Living in Poor Households
This might seem strange to a lot of people, but in fact, low-skilled workers don’t generally live in poor households. This leads to the obvious conclusion that the people who live in poor households don’t benefit from the minimum wage increase, so this strategy doesn’t actually alleviate poverty. The reason why this might come as a surprise to many people is because individuals who advocate for this increase paint a different picture of the typical minimum wage employee. In reality, not a lot of low-skilled workers are extremely poor people who are trying to keep their household afloat.
Most workers who would be affected by an increase in the minimum wage – which are those that typically earn between $7.25 and $10.10 per hour – live in households that can’t be considered poor. In a study conducted by labor economist Joseph Sabia of San Diego State University and economist Richard Burkhauser, only 13 percent of people whose life would be affected by a minimum wage increase live in what are deemed to be poor households. More than 40 percent live in households where the income is more than three times the poverty line.
Attempting to alleviate poverty is a goal that we all share. The question of how to accomplish this goal remains largely unanswered. What we know from recent studies on the minimum wage increase shows that this strategy is unlikely to accomplish that. Even more so, it might actually make it more difficult for low-skilled workers to find a job. We hope the negative effects of minimum wage increase we’ve presented today determined you to look more into this phenomenon.
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