Inflation is at 40-year highs, and wages are not rising fast enough to keep up.
One way the government can impact worker pay is by raising the minimum wage. The federal government sets a national minimum wage, but state governments can raise theirs higher.
But there is a decades long debate among economists, policy experts, and many others about what effect raising the minimum wage would have on the number of jobs.
If the cost of paying workers goes up, will businesses try to get by with fewer workers to save money?
If workers are making more, does that put more money back into the economy?
An analysis of government data can provide some insight into these questions, even if it can’t specifically say whether minimum wage increases, on its own, increase or decrease employment in a state.
How many states raised their minimum wages in the last decade?
Since 2014, 30 states and Washington, DC have increased their minimum wages. States increase their minimum wages in several ways. For example, 18 states and Washington, DC automatically adjust their minimum wages based on inflation. Some states raise their minimum wages in stages to reach a set number. Other states increase it all at once.
Twenty states either have minimum wages equal to the federal rate of $7.25 or have no minimum wage law, in which case the federal rate applies. The last time the federal minimum wage was raised was in July 2009.
According to the Bureau of Labor Statistics, in 2021, about 76 million workers aged 16 and older were paid hourly, representing 55.8% of all wage and salary workers. About 1.1 million or 1.4% of hourly paid workers are paid rates at or below the federal minimum wage.
Nearly 3 out of 4 workers earning the minimum wage or less in 2021 were employed in service occupations. Within the service sector, about 59% of all minimum wage workers are employed in food preparation and serving-related occupations. Some examples include chefs, cooks, waiters and waitresses, hosts and hostesses, dishwashers, and related jobs.
Looking into employment changes for these occupations following minimum wage increases can give insight into the effect that minimum wage has on employment since the occupations employ about 60% of those working at or below the minimum wage.
What happens to employment after an increase in minimum wage?
Thirty states and Washington, DC have raised their minimum wages since the last time the federal government introduced the rate.
In 22 states, including Washington, DC the number of jobs increased in the occupations in the year after a minimum wage increase. These areas average 8,666 more jobs in the occupations, an average increase of 2.7% in employment.
Nine states had decreases in employment for the occupations following minimum wage increases. These states averaged a loss of 2,156 employees or a 1.9% decrease in jobs.
Comparing changes in employment within the occupations for states that raised their minimum wages to those that did not can provide some insight into the impact of government pushing wages up.
Nineteen of the areas with minimum wage increases were divided up into three groups, states that raised their wages in 2010, 2015, or 2017.
The states within each group are wide-ranging, with different population demographics and growth rates, varying geographic regions, and economic profiles.
For the 2010 group, employment in the occupations increased by an average of 1.8% the year after the minimum wage increased. The increase in food preparation and service employment was 0.6 percentage points faster than that of the same occupations in the states that did not raise the minimum wage.
For the 2015 group, food preparation and service employment increased by an average of 3.8% the year after the minimum wage increased. That increase was 1.1 percentage points faster than the increase in food preparation and service employment in states that did not raise the minimum wage.
For the 2017 group, food preparation and service employment increased by an average of 2.4% the year after the minimum wage increased. That increase in employment was 1.2 percentage points greater than the increase of the same occupation in states using the federal minimum wage.
Food preparation and service employment grew more on average for the 19 states that increased the minimum wage than for the states using the federal minimum wage.
The impact of minimum wage increases is less clear when looking at changes to statewide employment. The 2010 group had little difference in average growth in statewide employment between the states that raised the minimum wage and those that did not. The 2017 group had smaller average employment growth compared to federal minimum wage states. Average employment growth for the 2015 group was greater in the minimum wage increasing states than in the states without a minimum wage increase.
How dothese employment gains compare to national employment levels?
For the year following minimum wage increases in 2010 and 2015, increases in employment across all states for the food preparation and serving-related occupations increased more than national employment. The national employment increase exceeded that of the occupations nationwide from 2017 to 2018.
From 2010 to 2011, national employment rose 1.2%, while the food preparation and serving occupations employment rose 1.7%.
Similar trends followed minimum wage increases in 2015 and 2017, where the increases in national employment were lower than increases in the food preparation and serving occupations. From 2015 to 2016, national employment rose 1.78% while employment in the occupations increased by 3.2%.
From 2017 to 2018 national employment rose 1.56% while employment in the occupations increased by 1.4%.
What are other effects of raising the minimum wage?
Raising the minimum wage can have an array of effects that are not reflected in employment data by state. Experts have analyzed the effect that minimum wage increases have on hours worked by employees, employee productivity, job creation, production, and forms of non-cash compensation such as health insurance. Other possible effects are changes to company pricing strategies, working conditions, higher-wage worker compensation, and benefit eligibility for low-income households.
To make a fair comparison, states had to have at least two years between wage increases. There had to be at least two states that raised their wages in the same year. And the year of the wage increase couldn’t have occurred within one year of any other comparison group. Nineteen out of the 31 areas with minimum wage increases met those criteria. Those 19 states were divided into three groups based on when their minimum wage increase lasting two or more years began.
The 2010 group includes Alaska, Connecticut, Delaware, Washington DC, Maine, Maryland, Nebraska, New Jersey, New York, South Dakota, and Virginia.
The 2015 group includes Arizona, Florida, Missouri, Montana, Ohio, and Washington.
The 2017 group includes Arkansas and Massachusetts.