Minimum Wage and its Impact on State and Federal Economies Essay

There is conflicting opinion, research and statistical data about the impact of minimum wage increases or decreases to the state-level and federal-level economies. From a microeconomics perspective, there is enough supporting evidence that minimum wage increases maintain negative outcomes to the economy. In similar accord, thinking from a macro perspective, minimum wage increases create similar negative economic conditions. Based on research and statistics, it should be said that minimum wage rates, when increasing rather than remaining steady, have broad negative consequences to state and federal economies.

The Evidence

Some of the highest state-issued minimum wage rates are Vermont at $8.46, Washington at $9.04 and Oregon at $8.80 (Parrott, 1). The intention of these increases was to improve poverty rates and also stimulate more consumption in the economy. However, a very recent news article indicates that the unemployment rate in Oregon has increased to 8.9 percent in September, up almost a whole percentage point in August (Foden-Vencil, 1). In Washington state, the unemployment rate rose from 8.3 percent in June to 8.6 percent in September (PSBJ, 1). In Vermont, the unemployment rate rose from 4.7 percent to five percent in August (CT Post, 1). Why is this significant?

The New England Public Policy Center indicates that rises in the minimum wage rate make it more inviting for business owners to cut employee benefits in an effort to offset higher payroll costs. A current study discovered statistically that when minimum wage rates increase by 20 percent, business-sponsored health care offerings to employees also decrease by four percent (NEPPC, 8). Because many business owners do not like to carry the stigma that is usually associated with social judgment for non-compliance to corporate social responsibility, they will often reduce hours of existing employees rather than slashing health care benefits (NEPPC, 8). All of these efforts are intended to prevent significant capital losses that occur when the minimum wage rates increases, especially important for small business owners without a strong cash or market position.

Three of the states having the highest minimum wage rates also all have increases in the unemployment rate at the state level. According to the National Center for Public Policy Research, minimum wage hikes actually cause job losses in the long-term (NCPPR, 1). This is because it is usually the small business owner that offers jobs at a minimum wage, however small businesses make up the majority of businesses currently operating in the United States. At the same time, small business owners are experiencing inflationary increases in their supply chain, cost of health care provision, distribution and transportation for finished products, and utility costs. Therefore, significant spikes in minimum wage cannot be offset except through investment and hedging strategies, which is something that small business is not in a position to consider.

Texas is one example of a state with a low minimum wage, in-line with the federal rate of $7.25. This state saw a very modest increase in unemployment from July to September, however, the unemployment rate was nearly 100 percent stable from 2010 through most of 2012 (, 1). Unlike other states with significant wage increases and sharp increasing spikes in unemployment, Texas seems to defy the direct relationship between wage increases and unemployment rises. The same is true for Ohio, which also maintains a rate of $7.25, and this particular state saw modest drops month after month in 2012, with a currently stable rate of 7.25 percent, down from over 10% in 2010. This implication in this case, when compared to higher rates, is quite obvious.

At the federal level, minimum wage also has negative consequences when it is raised. It should however, to prevent bias from the analysis, recognize that higher wage increases provide the government with more tax revenues. An increase of $1.50, for a low-wage worker employed in a typical 40 hour week, would generate approximately eleven dollars of additional tax revenue per worker in America, per week. The implications for the federal budget are clear in this instance, especially considering that the federal government maintains no expenditures in establishing a higher minimum wage.

Despite this, minimum wage increases affect the federal economy similarly to state-level scenarios. The Global Labor University provides information from many statistical studies and theorists in macroeconomics, coming to the conclusion that there are no broad systemic increases in employment that occur following minimum wage increases (Herr & Kazandziska, 15). Why is this? One problem can be shown by the Consumer Price Index, which measures inflation in certain industries and products in relation to pricing established for these goods and services. In 2012, the food sector saw mean increases in food at 2.3 percent (Bureau of Labor Statistics, 1). One of the largest household expenditures, especially true for families, is food costs in relation to other lifestyle-sustaining expenditures. Since 2009, food costs, on average, have increased approximately eight percent. These numbers take into consideration commodity increases, such as grain and corn, without specifically highlighting individual food products. Food is only one sector that has witnessed increases in the Consumer Price Index, however it does illustrate how consumption tends to decrease in relation to inflation which offsets tax revenue gains for the federal government.

Though consumers in low-wage jobs may see a small increase in their salaries, the rising costs of multiple products and services in many different consumer products sectors erase gains of moderately higher income levels. Businesses that, in turn, sell less products or have lower inventory holding costs for reducing their stock levels to meet demand, also provide much less tax revenue to the federal government. The revenues earned from large businesses witnessing drops in consumer spending are significantly higher than the moderate eleven dollar increase in federal revenue. Though the wage increase, itself, is not the problem with negatively affecting the federal economy, it is the inter-dependency of many different financial considerations in retail, household durables, foods, and credit financing that has the highest negative impact. When businesses are forced to cut costs to make up the difference for what they are spending on new wage demands, this too depletes revenues earned from the commercial sector for the federal government.

The goal of setting a higher minimum wage is to boost tax revenues for the federal government and also to provide a better living wage to those struggling economically. It is intended to increase motivation to perform which, when looking at the mathematics in business research, improves productivity. The federal-level economy is definitely not insulated from changes in pricing and consumption behavior. The modest increases in income generally only represent an additional household increase of $45 weekly after paying taxes. It simply does not offset rising inflation costs in a variety of different industries. The losses to business spending and ability to expand, along with less consumption behavior, leaves the federal government in the red even though the wage increases are intended to improve national economic position.


Though the situation with state and federal economies associated with minimum wage rates might seem repetitive, the impact to both systems is very much the same. There seem to be no distinguishing differences in the state economy as with the federal economy that would have one gain while the other fails. Consumer pricing on products is a major factor that is related to inflation rates and these continue to increase at a much faster pace than incremental changes to the minimum wage rate. Having states adopt their own rates, instead of abiding by federal rates, even compounds the problem with improving economic health in the local region. Minimum wage increases simply are not a major benefit to the economy, either state or federal.

Works Cited

Bureau of Labor Statistics. “Consumer Price Index for all Urban Consumers” (2012). Accessed September 19, 2012 at CT Post. “Vt. Unemployment Rate for July is 5 percent” (2012). Accessed September 18, 2012 at Foden-Vencil, Kristian.

“Oregon’s Unemployment Rate Climbs Despite Job Growth”, OPB. (2012) Accessed September 19, 2012 at Herr, H. & Kazandziska, M. “Principles of Minimum Wage Policy – Economics, Institutions and Recommendations”, Global Labor University (2011). Accessed September 19, 2012 at NEPPC.

“The Potential Economic Impact of Increasing the Minimum Wage in Massachusetts”, New England Public Policy Center (2006). Accessed September 18, 2012 at

Parrott, James. “Raising New York’s Minimum Wage Will Boost the State Economy”. News from the Fiscal Policy Institute (2012). Accessed September 20, 2012 at PSBJ. “Washington State Unemployment Rises Again”.

Puget Sound Business Journal (2012). Accessed September 19, 2012 at The National Center for Public Policy Research. “Employment: Do Minimum Wage Increases Benefit Workers and the Economy?” (2007). Accessed September 18, 2012 at “Texas Unemployment Rate”. Yahoo! Finance. (2012). Accessed September 18, 2012 at