Your entry-level economics class taught you (or should have) that when the price of something goes up, less of it is consumed. This holds for cars, interest rates, widgets, and wages. So, during this week’s State of the Union address, when President Obama called for raising the federal minimum wage from its current level of $7.25 per hour to $9.00 per hour, and tagging the minimum wage to the cost of living, it drew a decent amount of criticism. The thinking against raising the minimum wage goes like this: if you raise the minimum wage, employers will be able to afford fewer workers; employment will go down; the economy is worse off. The counterargument is that with more money in their pockets, minimum-wage workers, will contribute more to the economy. However, with unemployment at 7.8%, nobody wants to be on the wrong side of the argument.
The problem is that basic economics seems to break down on this point. A recent paper from John Schmitt at the Center for Economic Policy Research surveys recent research on minimum wages and finds that there’s little effect on employment.
Before we look at that, though, let’s look at what this minimum-wage issue really looks like. Read more