The potential benefits of increasing the minimum wage are higher wages for the poorest workers. However, after raising the minimum wage, it becomes unprofitable for companies to hire the same number of employees as before (Khan Academy, 2012). Employers switch their preferences to more experienced employees with a higher level of education (LibertyPen, 2012). The minimum wage increase could discourage firms from hiring lower-paid workers and replace them with workers whose earnings are not affected by the rise in the minimum wage.
An increase in minimum wage can reduce employment, but only marginally, mainly among the youngest workers. The least qualified employers are hurt, those who, on the contrary, are supposed to benefit from the increase in the minimum wage (Khan Academy, 2012). This applies primarily to those enterprises where low-paid workers have a relatively large share. A higher minimum wage will lead to higher labor costs. Higher costs of employers will lead to higher prices, further reducing the demand for labor.
Due to the negative impact of the high minimum wage on the employment of the least paid workers, this mechanism does not diminish poverty. Raising the minimum wage, for example, does not reduce participation rates in public assistance programs such as Medicaid (Jardim et al., 2017). The minimum wage increase affects low-income families (Congress of the United States Congressional Budget Office, 2014). However, such a policy does not achieve the goal; therefore, the minimum wage to help the poor is ineffective.
Congress of the United States Congressional Budget Office. (2014). The effects of a minimum-wage increase on employment and family income.
Jardim, E., Long, M. C., Plotnick, R., Van Inwegen, E., Vigdor, J., & Wething, H. (2017). Minimum wage increases, wages, and low-wage employment: Evidence from Seattle, National Bureau of Economic Research, 23532, 1-75
Khan Academy. (2012). Minimum wage and price floors | Microeconomics | Khan Academy [Video]. YouTube.
LibertyPen. (2012). John Stossel – Real world effects of minimum wage [Video]. YouTube.