How the Minimum Wage Impacts Unemployment

Ever since the federal minimum wage was established in 1938 at $0.25 per hour, politicians have debated whether it’s good or bad for overall employment. The arguments center on proposals to raise the minimum hourly wage, which is $7.25 at the federal level as of January 2025.

Some argue that if workers were paid more, employers would cut back on hiring. Higher wages would decrease profits, they say, hurting both employers and shareholders. Others contend that any increase in pay puts more money in workers’ pockets, boosts consumer spending, and benefits employers.

Key Takeaways

• The minimum wage has been a political issue since its inception in the 1930s.
• Opponents of raising the minimum wage argue that it will cause unemployment, while proponents say it could boost consumer spending, resulting in more jobs.
• Many cities, states, and employers have established minimum wages that are different from the federal minimum wage.

Effects on Employment

Advocates argue that a higher minimum wage keeps workers and their families out of poverty and averts the personal and societal problems that poverty is known to cause.

The federal minimum hourly rate is $7.25, which is $15,080 annually (with a 40-hour workweek and no vacation). It has remained unchanged since July 2009. $15,080 is almost exactly at the $15,060 federal poverty line for a one-person household in all states except Alaska and Hawaii in 2024.

Initiatives to increase the federal wage, like the Raise the Wage Act of 2019, have not been successful. The Congressional Budget Office (CBO) published “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage” in 2019 and predicted what would happen if the minimum wage were raised in annual increments from 2020 to 2025 to $10, $12, or $15.

• A $10 minimum would raise earnings for up to 3.5 million workers and “have virtually no effect on employment,” the report found. It also wouldn’t have any appreciable impact on the number of people in poverty.
• A $12 minimum would benefit up to 11 million workers while reducing overall employment by an estimated 300,000 jobs. The number of people whose annual incomes fell below the poverty threshold in 2025 would be reduced by 400,000.
• A $15 minimum would benefit up to 27 million workers but cost an estimated 1.3 million jobs. At the same time, essentially the same number of people would see their annual incomes rise above the poverty line.

Important

The Congressional Budget Office data suggests that raising the federal minimum wage from $7.25 to $10 would have a negligible effect on overall employment, while a higher minimum wage would involve trade-offs.

Minimum Wage by State or City

Thirty states plus the District of Columbia, Puerto Rico, Guam, and the Virgin Islands mandate minimum wages higher than the federal minimum. As of January 2025, highest mandated minimum wage is in Washington, D.C., at $17.50 an hour.

The remaining states either match the federal level of $7.25, have no minimum wage, or set their level below the federal rate. In states with no minimum wage or a lower wage, the federal minimum wage applies.

Some cities and counties have also established minimum wages. Chicago’s minimum wage is $16.20 for employers with four or more workers. This is compared with $15 for the state of Illinois. Florida residents voted in November 2020 to increase the state’s minimum wage incrementally until it reaches $15 per hour in September 2026.

Employer Minimums

Some employers have established company-wide minimum wages. Those include big retailers such as Amazon, which offers workers an average of $18 per hour for new hires, and Costco, which pays a minimum of $19.50 per hour.

Hourly wages are only part of the equation. Another factor is hours of work. If an employer raises its workers’ wages but cuts back on their hours, as reports suggest, workers may see little or no benefit on payday.

What Is the Federal Minimum Wage?

The federal minimum wage is $7.25. However, many states and cities have a higher minimum wage. Many companies have also established a higher minimum wage than the federal minimum wage.

Is the Minimum Wage Meant to Be a Living Wage?

When the minimum wage was established under President Franklin D. Roosevelt, he said he intended for it to be more than “a bare subsistence level…I mean the wages of decent living.” So, yes, the minimum wage is meant to be a living wage.

Does Increasing the Minimum Wage Increase Unemployment?

Increasing the minimum wage comes with the risk of additional unemployment, depending on the increase. Some argue that increasing the minimum wage would increase the costs for businesses, resulting in them hiring fewer workers.

The Bottom Line

Raising the minimum wage has positive impacts, such as bringing people out of poverty and increasing income for individuals and families. However, increasing the minimum wage can also lead to increased unemployment, depending on the wage increase.