Minimum wage is a hotly-contested topic among small business owners in the US. Some are strongly opposed to raising the minimum wage while others are overwhelmingly in favor of it. To really understand how—or whether–it affects hiring, let’s take a closer look at the two conflicting theories:
Theory #1: Basic economic theory explains that an increase in the minimum wage would result in increased income for minimum wage workers but would also result in elimination of some low wage jobs. What this means is that a higher minimum wage results in more highly-paid workers, but fewer job opportunities. The hiring process might become more specialized and selective, since the jobs would be less plentiful and more in demand. Also potentially, companies would not have the money to hire new employees anymore because the expense of maintaining their current employees and adding/maintaining additional employees would be unaffordable. Yet in many states with high minimum wage, this theory is disproved by low unemployment rates.
Theory #2: The contrasting theory argues that the minimum wage has little to no effect on employment prospects of low-wage workers because the cost shock of the minimum wage is small compared to most companies’ overall costs. In other words, minimum wage is often changed so slightly that it does not impact how many low-wage employees companies can afford to hire. However, though low-wage employment prospects may not change, companies may find other ways to cut spending and combat the money lost. Examples of this may include reduced hours, reduced non-wage benefits, reduced training, pay cuts to more highly-paid workers, increased productivity, increased consumer prices or smaller profit margins. Therefore, those hit hardest by an increased minimum wage would not be those earning minimum wage. Instead it would be higher-skill, higher paid workers who could lose both money and benefits.
a combination of both theories may be most accurate. In places such as
Washington, DC, where the minimum wage tops the scale at $10.10 an hour,
unemployment is remarkably low. However, this isn’t true everywhere with an
equally high minimum wage. Similarly, unemployment rates in places with lower
minimum wage can vary from high to low. These inconsistencies point to a
conclusion that minimum wage impacts each job market differently, depending on
the geographic location.