How the Minimum Wage Impacts Unemployment

Would raising the minimum wage for workers mean fewer jobs overall?

Greg Daugherty has worked 25+ years as an editor and writer for major publications and websites. He is also the author of two books.

Toby Walters is a financial writer, investor, and lifelong learner. He has a passion for analyzing economic and financial data and sharing it with others.

1. What Is Unemployment? Causes, Types, and Measurement
2. Termination of Employment
3. Unemployment Claim
4. Unemployment Compensation
5. Severance Pay

Negotiate Severance—If You Can

1. Severance Agreements
2. Negotiating Severance
3. Preparing for a Layoff

How to File for Unemployment Insurance

1. Unemployment Insurance
2. Applying for Unemployment Insurance
3. Who Doesn't Get Unemployment Insurance?
4. Private Unemployment Insurance

Managing Finances During Unemployment

1. Paying Your Bills When You're Unemployed
2. 401(k) Withdrawals and Unemployment
3. COBRA Health Insurance Coverage
4. Medical Bills
5. When Unemployment Benefits Run Out

Understanding the Unemployment Rate

1. Unemployment Rate
2. Calculating the U.S. Monthly Unemployment Rate
3. Highest and Lowest Rates in the World
4. Understanding the Employment Report
5. U3 vs. U6 Unemployment Rate
6. Participation Rate vs. Unemployment Rate
7. What The Unemployment Rate Doesn't Reveal

Unemployment and the Economy

1. The Unemployment Rate Affects Everybody
2. How Inflation and Unemployment Are Related
3. Minimum Wage and Unemployment

Dictionary of Economic Terms A-F

1. Cyclical Unemployment
2. Disguised Unemployment
3. Employment-to-Population Ratio
4. Frictional Unemployment
5. Full Employment

Dictionary of Economic Terms G-Z

1. Labor Force Participation Rate
2. Labor Market
3. Natural Unemployment
4. Structural Unemployment

The federal minimum wage was established in 1938 at $0.25 per hour, and politicians have since debated whether it's good or bad for overall employment. The arguments center on proposals to raise the minimum hourly rate, which is $7.25 at the federal level in 2024.

Some argue that if workers are paid more, employers will reduce hiring. Higher wages would decrease profits, 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, counties, states, and employers have established minimum wages different from the federal minimum rate.

Effects on Employment

Higher minimum wage advocates contend 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 of $7.25, or $15,080 annually, has remained unchanged since July 2009. As a salary, that's $500 over the federal poverty level of $14,580 per year for a one-person household in all states except Alaska and Hawaii in 2023.

Initiatives to increase the federal rate, 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." Nor would it have an 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, a similar number of people, 1.3 million, would see their annual incomes rise above the poverty threshold.
  

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 2024, they ranged from $8.75 an hour in West Virginia to $17 in Washington, D.C.

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 rate, the federal minimum wage applies.

Some cities and counties have also established minimum wages. In 2023, Chicago's minimum wage is $15.80 for employers with 21 or more workers. It will increase again on July 1, 2024. This is compared with $14 for the state of Illinois. Florida residents voted in Nov. 2020 to increase the state's minimum wage incrementally until it reaches $15 per hour in Sept. 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 ($15 otherwise), and Costco, which pays $17 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, cities, and municipalities 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 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, which today it is not.

Does Increasing the Minimum Wage Increase Unemployment?

Increasing the minimum wage comes with the risk of additional unemployment, depending on the increase in the rate. 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, because employers may seek alternatives, such as technology and automation.

1. U.S. Department of Labor. "Minimum Wage."
2. U.S. Department of Labor. "Changes in Basic Minimum Wages in Non-Farm Employment Under State Law: Selected Years 1968 to 2022."
3. Govinfo. "From Poverty to Opportunity: How a Fair Minimum Wage Will Help Working Families Succeed."
4. ASPE, Office of the Assistant Secretary for Planning and Evaluation. "Poverty Guidelines."
5. Congress.gov. "H.R.582 - Raise the Wage Act."
6. Congressional Budget Office. "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," Page 1.
7. Congressional Budget Office. "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," Page 4.
8. Congressional Budget Office. "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," Pages 1, 4.
9. Congressional Budget Office. "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," Pages 1, 4–5.
10. U.S. Department of Labor. "Consolidated Minimum Wage Table."
11. U.S. Department of Labor. "State Minimum Wage Laws."
12. U.S. Department of Labor. "Minimum Wage."
13. UC Berkeley Labor Center. "Inventory of US City and County Minimum Wage Ordinances."
14. City of Chicago. "Minimum Wage."
15. Illinois Department of Labor. "Minimum Wage Law."
16. Florida State University. "Florida's Minimum Wage Changes Through 2026."
17. CNN. "Costco Raised Its Minimum Wage to $17 an Hour."
18. Amazon. "Amazon Continues to Advocate for Higher Federal and State Minimum Wages."
19. Harvard Business Review. "Research: When a Higher Minimum Wage Leads to Lower Compensation."
20. FDR Library. "Franklin Roosevelt's Statement on the National Industrial Recovery Act."

1. What Is Unemployment? Causes, Types, and Measurement
2. Termination of Employment
3. Unemployment Claim
4. Unemployment Compensation
5. Severance Pay

Negotiate Severance—If You Can

1. Severance Agreements
2. Negotiating Severance
3. Preparing for a Layoff

How to File for Unemployment Insurance

1. Unemployment Insurance
2. Applying for Unemployment Insurance
3. Who Doesn't Get Unemployment Insurance?
4. Private Unemployment Insurance

Managing Finances During Unemployment

1. Paying Your Bills When You're Unemployed
2. 401(k) Withdrawals and Unemployment
3. COBRA Health Insurance Coverage
4. Medical Bills
5. When Unemployment Benefits Run Out

Understanding the Unemployment Rate

1. Unemployment Rate
2. Calculating the U.S. Monthly Unemployment Rate
3. Highest and Lowest Rates in the World
4. Understanding the Employment Report
5. U3 vs. U6 Unemployment Rate
6. Participation Rate vs. Unemployment Rate
7. What The Unemployment Rate Doesn't Reveal

Unemployment and the Economy

1. The Unemployment Rate Affects Everybody
2. How Inflation and Unemployment Are Related
3. Minimum Wage and Unemployment

Dictionary of Economic Terms A-F

1. Cyclical Unemployment
2. Disguised Unemployment
3. Employment-to-Population Ratio
4. Frictional Unemployment
5. Full Employment

Dictionary of Economic Terms G-Z

1. Labor Force Participation Rate
2. Labor Market
3. Natural Unemployment
4. Structural Unemployment

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

The International Finance Corporation (IFC) is an organization dedicated to helping the private sector within developing countries.

A fiscal deficit is a shortfall in a government's income compared with its spending. A government that has a fiscal deficit is spending beyond its means.

In financial planning or the budgeting process, a balanced budget means that revenues are equal to or greater than total expenses.

A fiscal imbalance is a situation that occurs when future income streams for government units don't balance the future debt and spending obligations.

The debt ceiling is a limit that Congress imposes on the amount that the federal government can owe. Discover the current debt ceiling and its economic impact.

The unemployment rate is the percentage of the total unemployed labor force actively seeking employment and willing to work.

• About Us
• Terms of Service
• Dictionary
• Editorial Policy
• Advertise
• News
• Privacy Policy
• Contact Us
• Careers
• EU Privacy

We Care About Your Privacy

We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.

We and our partners process data to provide:

Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)