Minimum-Wage Increases: Help or Hurt the Economy?

Defeat of a minimum-wage package in Congress, passage of a "living wage" of $10.00 an hour in Chicago, and a proposal in Colorado to raise the minimum wage from $5.15 an hour to $6.85--these measures raise questions anew about the effect of wage increases on the level of employment.

Typical is the argument that raising wages increases the level of unemployment. It seems obvious that an employer required to raise wages ordinarily would have to lay off workers. But this is looking at a "micro" model, whereas what is required is a look at the "macro" economy. The argument here is that raising wages increases demand, which in turn raises the level of employment. This is the stronger argument; what is required is a look not at only one firm but at the economy as a whole.

The relevant questions here are the rate of unemployment and the structure of income as a whole. Would the market support an increase in wages? At the present time unemployment is sufficiently high--at 4.8 percent-- and disparities in income are so great that a lessening of the disparities would be expected to raise demand. Wages are clearly too low for maximum economic performance.

Data from previous wage increases indicate a positive effect of wage increases on the level of employment. Rarely if ever are wages in the U.S. too high for optimal economic performance.