The Positive Effects of Minimum Wage on the Economy


For a long time, the negative effects of minimum wage were debated. What is the effect on low-income earners? What will happen to inflation? Will it slow down the economy by raising prices for goods and services? How big is Spain compared to texas?

But with more research coming in, newer studies offer a different perspective. The most recent data show that minimum wage can actually create positive impacts for low-wage earners as well as benefit an entire economy.

It’s worth noting that these benefits are far from universal and should not be relied upon to fix economic woes – but they are helpful influences nonetheless.

1. Minimum Wage Has a Positive Effect on the Economy

One of the most widely accepted benefits of increasing minimum wage is that it increases consumer demand and therefore overall economic growth.

As minimum wage increases, workers are given more money to spend and will subsequently purchase more goods and services. The increased buying power of consumers will result in an increase in production, which can then be spent on more goods and services. This cycle of growth ultimately drives up the economy by increasing demand for goods and services.

This theory is based on Keynesian economics, which provides a wide array of benefits beyond just expanding the economy through increased consumer spending.

2. It Helps the Larger Economy

Another positive effect of minimum wage is to help stimulate the economy of a large city, state or region. For example, Seattle has recently passed an ordinance raising its minimum wage to $15 per hour by 2018. By doing so, it will not only provide a better livelihood for low-wage earners but also help stimulate the Seattle economy as a whole.

The increased buying power of the low-wage earners will help stimulate production and create more job opportunities. This can potentially benefit those with higher wages too, especially if businesses need to hire others to satisfy a spike in demand.

3. Minimum Wage Creates Job Opportunities

A common argument against raising the minimum wage is that it will lead to job loss as employers try to adapt their business models to the new changes. However, research has shown that minimum wage actually creates employment opportunities for people who are out of work or underemployed.

One of the possible causes for unemployment is the state of demand (or lack thereof) for a particular job or skill set. If employers get the impression that there are a lot of people looking for certain types of jobs, they will be less likely to hire people from the available workforce because doing so would reduce their profit margin by increasing pay without getting much in return.

However, when minimum wage increases, businesses must either adapt or face closure. To adapt would mean hiring more workers to increase productivity while keeping costs in check. This creates more jobs and increases wealth and prosperity.

On top of that, minimum wage can improve social welfare in general by improving economic conditions for low-wage earners and reducing poverty rates.

4. Minimum Wage Creates Social Welfare

As stated by Arindrajit Dube’s study for the U.S. Department of Labor, a 10% increase in the minimum wage was correlated with a 3-4% decrease in poverty rates. This is a relatively small but significant correlation that warrants more research.

In addition, low-wage earners are more likely to spend their wages immediately as opposed to saving them or investing them. It is well-known that saving and investing often results in greater returns and other benefits down the road but it also means less consumer spending and greater economic growth over time.

However, when low-wage earners get pay increases, they tend to use the money to buy more goods and services, which creates more jobs and improves the economy. This is why raising the minimum wage is such a contentious issue. Everyone wants economic growth but no one wants to give up their own financial gains to ensure that happens.

5. Minimum Wage Can Affect Social Norms

Another interesting discussion is about how minimum wage can affect social norms as these relate to incomes and wages. For example, when companies start paying higher wages for certain jobs or skill sets, other employers will be encouraged to raise the wages of people doing similar work so as not to lose out on potential employees who would rather work for higher wages elsewhere.

The result is an upward pressure on wages that can either benefit or negatively affect lower-income earners. For example, if a certain job is suddenly perceived as more competitive and desirable, employers will be able to provide more competitive wages to attract people willing to work at a higher rate.

In this sense, minimum wage can have different meanings depending on how it is structured. This can create opportunities for people to move up and be more competitive in the job market.

6. Higher Minimum Wage Pays More Than a Living Wage

The most common and the most positive impact of minimum wage is that it provides a living wage. There is a growing number of studies that have shown that those who earn less than the minimum wage cannot support themselves on a single income and still maintain basic necessities.

Beyond this, there are other issues with low-wage earners as well such as lack of health care benefits, lack of retirement plans and low pensions, inadequate social security programs, lack of education opportunities and underemployment. These factors can limit their capacity to be productive in the workplace which can negatively affect an entire economy.


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