Unemployment Effects of Minimum Wages Essay

During his “State of the Union Speech”, President Barrack Obama asked the Congress to increase minimum wages in the US from $7.25 to $10.10 an hour. (White House) The last 45 years have not seen any increase in minimum wages in the USA, even though the economy has grown considerably and overall production has increased significantly. It is believed that a raise in the Minimum wage will increase the income of several workers in the US as well as increase the overall profitability of companies. (White House). Despite a huge change in the standard of living in the past years, the minimum wage has remained unchanged. If the growth in minimum wages had been at par with the growth in average Wages, minimum wages in America would have been $10.50 today. Moreover, if they had been concurrent with ‘productivity,’ then the minimum wages should have been $18.75 and if it had grown at the same rate as the upper 1% wage paid to workers, the minimum wage would have been $28 per hour today. (Cooper and Hall)

There are many returns associated with increasing the minimum wages. Firstly, contrary to many who believe that increasing minimum wages creates unemployment in the economy, it actually creates more employment. Secondly, an increase in minimum wages would give more money in the hands of the workers, which would mean extra spending in the economy. According to the economic analysis done by Cooper & Hall (2013), they say that a “$115,000 increase in economic activity results in the creation of one new full-time-equivalent job in the current economy.” (Cooper and Hall).

Considering this analysis, they conclude that an increase in minimum wage from the current levels to $10.10 an hour would result in extra employment opportunities of about 140,000 new workers. However, Jacob Mincer (1974) believed that there was no real evidence to suggest that an increase in minimum wages would lead to unemployment or create employment. (Mincer). Currently, for each job opportunity in the US, there is an unemployment of approximately 3.4 (Shierholz cited by Cooper and Hall). This is because the employers do not have to offer the adequate wages to employ a worker, nor do they have to increase wages to retain the worker. Cooper and Hall quote American Enterprise Institute scholar Desmond Lachman, a former managing director at Salomon Smith Barney, as told to The New York Times, “Corporations are taking huge advantage of the slack in the labour market—they are in a very strong position and workers are in a very weak position. They are using that bargaining power to cut benefits and wages, and to shorten hours.” (Cooper and Hall)

Raising the minimum wages is expected to benefit more than 28 million workers in the US, and approximately 19 million workers are expected to see a direct rise in their wages. (White House) IKEA, has increased its minimum wages to $11.00 an hour, which is more than the required increase. (Smith) The changes are expected to come in effect from January 1, 2015. This is an overall increase of over 17% at current wage levels at IKEA. (Smith). Massachusetts is expected to have the highest minimum wages in all states in the US, by raising the least amount of wages to $11.00 an hour by the year 2017. (Smith) Seattle too is planning to increase the minimum wages to $15.00 an hour from the present level of $9.32. (Smith) Companies who have less than 500 workers have untill the end of 2021 to comply with this new regulation. (Smith)

There are many positives related to the increase in minimum wages in America. There would be a rise in the family incomes of many households, particularly those still reeling from the effects of the Great Recession, it is expected to provide a stimulus to the economy and it is estimated that about 140000 new jobs will be created. Thus, it can be concluded that raising the minimum wage in America is sound economic decision, in the welfare of both workers as well as the business community.


Cooper and Hall. “RAISING THE FEDERAL MINIMUM WAGE TO $10.10 WOULD GIVE WORKING FAMILIES, AND THE OVERALL ECONOMY A BOOST.” Economic Policy Institute; Briefing Paper 357 13 March 2013.

Mincer, Jacob. “Unemployment Effects of Minimum Wages.” NBER Working Paper No. 39 May 1974.

Smith, Aaron. Ikea lifting minimum wage to nearly $11 an hour. 26 June 2014. 30 June 2014 .

White House. RAISE the WAGE. 2014. 30 June 2014 .