How Minimum Wages May Raise Unemployment

Minimum wage laws have been in effect in the United States since 1938. The rate has changed nationally more than 20 times since then. But some feel the increases haven’t been enough, leading to heated debates over whether or not federal and state governments should raise the minimum wage.

The minimum wage is the minimum amount employers are legally required to pay their employees. Advocates who push for increases say those who work minimum wage jobs just can’t afford to keep up with the rising cost of living; many of whom are living below the poverty level.

However, according to leading economists—including famed billionaire investor Warren Buffett—minimum wages can actually raise unemployment by giving employers less incentive to hire and more incentive to automate and outsource tasks that low-wage employees previously performed.

Higher mandated minimum wages also force businesses to raise prices to maintain desired profit margins. Higher prices can lead to less business, which means less revenue and, therefore, less money to hire and pay employees.

Key Takeaways

• Although the federal minimum wage is $7.25, the rate in many states and cities is higher.
• Those pushing for an increase in the minimum wage say the current rate keeps people below the poverty line and doesn’t keep up with the cost of living.
• Some economists argue that minimum wage increases may lead employers to hire fewer workers.
• Other potential setbacks to wage increases include automation and outsourcing.

Minimum Wage Rates

The United States federal government set the national minimum wage rate at $7.25 per hour in July 2009. But many states have minimum wage rates that are much higher, with the national average hovering around $11 per hour.

For example, Washington, D.C. raises its minimum wage incrementally each year, setting the rate at $17.50 per hour effective July 1, 2024, with another increase on July 1, 2025. Other states that have a minimum wage of $15 or higher include California ($16.50), Connecticut ($16.35), Maryland ($15), New Jersey ($15.49), New York ($15.50 or $16.50), and Washington ($16.66).

So if there’s a discrepancy between the federal and state rates, how do employees get paid? According to the U.S. Department of Labor, employees receive the highest minimum rate in cases where they are subject to both state and federal wage laws.

One important point to note, though, is that minimum wage rates are slightly different for employees who receive tips. Employers are only required to pay these employees $2.13 per hour if that rate plus tips equals the $7.25 federal minimum wage. If their hourly earnings are less than the federal rate, the employer has to make up the difference.

The Push for a Higher Minimum Wage

There is no question just how tough it can be to make a living and support a family on a minimum-wage income. Compounding the issue is the fact that minimum wage increases have not kept pace with the cost of living since the 1960s. Relative to living costs, the value of the minimum wage in the United States peaked in 1968 and has been on a downward trend ever since.

Here’s an example to demonstrate. Let’s say single-father Adam works a minimum-wage job in Tennessee. The state has no minimum wage, so his salary is the federal minimum wage rate: $7.25 an hour. Adam earns $290 working 40 hours each week, or $1,160 each month.

This figure, of course, doesn’t factor in any taxes or deductions from Adam’s paycheck. According to Payscale, the median rent for an apartment in Knoxville is about $1,170 per month as of Jan. 2025, while the average monthly electricity bill is $177.06. Adam’s entire paycheck isn’t enough to cover housing and utilities, much less anything else, such as food.

Feeling the pinch of lowered real income, minimum-wage employees and their advocates have gone to great lengths since the 2010s to raise awareness about the plight of low-wage workers.

How Companies Respond to Higher Minimum Wages

In a perfect world, a higher minimum wage would mean nothing more than the lowest-paid workers at fast-food restaurants, grocery stores, and so forth making more per hour instead of $7.25 per hour. Everything else about these companies’ business models would remain the same.

Most economists agree that the world is imperfect and confounded by many other variables that are affected by a minimum wage increase. Most businesses set their budgets at least a year in advance, designating a fixed amount of money to wage expenses.

Changes in business volume throughout the year can obviously necessitate on-the-fly adjustments to wage expenses. For the most part, companies have a set idea of how much they want to spend on hiring workers.

When forced to pay workers more per hour, companies have to hire fewer workers or assign the same number of workers fewer hours to keep from going over their predetermined wage expense limits. Many companies do just that or, when possible, they ship jobs overseas, where the per-hour expense of an employee is significantly lower.

Automation is another alternative that many companies turn to to avoid higher wage expenses. This is particularly true in large cities like Los Angeles and Seattle. Rather than giving their order to a live employee at the counter, fast-food customers input what they want into a computer, which also accepts payment and even deposits the paper sack full of food when it comes out of the kitchen.

Note

As of 2023 (the latest information available), 1.1% of American hourly workers were paid at the federal minimum wage or lower.

Higher Wages, Higher Prices, Fewer Employees

One of the most important metrics for a business is margin; another word for profit. Margin is the difference between revenues and expenses, and any successful business has a target margin it tries to maintain.

When expenses increase, which happens when a higher mandated minimum wage pushes up a company’s wage expense, revenues must also rise for the company to maintain its margin. Therefore, many businesses respond to higher wages by raising prices.

When the cost of a fast-food hamburger increases to cover higher wages, many customers respond by not buying hamburgers. After all, most people don’t eat fast food because it’s delicious, they eat it because it’s cheap. When customers jump ship, companies struggle to stay in business. Many Seattle restaurants folded after the city’s $15 minimum wage went into effect (as of 2025 it is $20.76). When that happens, those $15 per hour jobs disappear as quickly as they came.

What Is the Lowest Wage in the U.S.?

The lowest wage in the U.S. is the federal minimum wage of $7.25 per hour. This wage has not increased since 2009. Most states, however, have higher minimum wages.

Which Country Has the Lowest Minimum Wage?

Georgia has the lowest minimum wage of any country with a minimum wage of approximately $7.45 a month for private-sector workers. Bangladesh also has a low minimum wage of $14.62 a month.

Is $15 a Living Wage?

In most locations in the U.S., $15 per hour is not a living wage. Workers would need more than this to meet the living wage standards in the U.S. For example, the living wage for a childless adult in California is $27.32, in Mississippi it is $19.89, in Arkansas it is $19.10, in New York it is $26.86, in Florida it is $22.43, in Washington it is $25.60, in Montana it is $20.37, and in Nebraska it is $20.12.

The Bottom Line

The federal minimum wage is not enough for most people to survive on as it does not meet the living wage levels. As the federal government has failed to take action in increasing the minimum wage, states and other local governments of most states have increased theirs.

As the argument on whether or not to increase the minimum wage continues, the fact is that prices have increased dramatically since the last minimum wage increase in 2009, making life costlier for Americans.