Home > Economics FAQs Blogs > What is the impact of a minimum wage on unemployment?
This question pertains to topics in Microeconomics, such as Labour Markets, Minimum Wage, and Unemployment.
Minimum Wage: The lowest remuneration that employers can legally pay their workers.
Unemployment: The state of being without a job, while actively looking for one.
The impact of a minimum wage on unemployment is a contentious issue among economists.
The classical economic theory posits that a minimum wage set above the market-clearing level (the wage level at which supply of labour equals demand for labour) can lead to higher unemployment. This is because a minimum wage, if set too high, may price low-skilled or inexperienced workers out of the job market as employers might not be willing or able to pay the minimum wage to these workers, leading to an excess supply of labour, i.e., unemployment.
However, some modern empirical studies suggest that the impact of a minimum wage on unemployment is not as significant as traditional theory would suggest. These studies argue that higher wages can improve worker productivity, reduce employee turnover, and stimulate demand in the economy, thereby potentially offsetting some of the employment losses.
United States: The federal minimum wage in the United States has remained $7.25 per hour since 2009. Some states have opted for higher minimum wages, leading to differing rates of unemployment across states. Research findings about the effect of these wage increases on unemployment rates have been mixed.
United Kingdom: The introduction of the National Minimum Wage (NMW) in 1999 initially led to concerns about potential job losses. However, subsequent research has suggested that the NMW has had little impact on unemployment, partly because it was set at a relatively modest level.
The impact of a minimum wage on unemployment is complex and depends on various factors such as the level at which the minimum wage is set and the specific characteristics of the labour market. While traditional economic theory suggests that a high minimum wage can increase unemployment, more recent empirical studies offer a more nuanced view. Real-world examples, such as those from the United States and the United Kingdom, illustrate the diversity of experiences and outcomes related to minimum wage policies.
