Minimum Wage Research: What Studies Show About Effects on Workers and Businesses

Minimum wage policy is one of the most extensively studied and debated topics in labor economics. The question of whether raising the minimum wage increases earnings for low-wage workers or reduces employment by pricing some workers out of jobs has been debated since minimum wage laws were first enacted. The research has evolved significantly over the past three decades, with methodological advances producing a substantially clearer picture of the effects of minimum wage increases, while significant uncertainties and genuine disagreements among economists remain. The standard economic model predicts that minimum wage increases above the market-clearing wage will reduce employment by raising the cost of labor. This prediction, derived from basic supply and demand analysis, was the dominant view in labor economics for much of the twentieth century and was widely cited by business groups and conservative economists in minimum wage debates. The strength of this prediction, however, depends on assumptions about labor market competition that empirical research has increasingly called into question. Card and Krueger's 1994 study of New Jersey fast food employment following a minimum wage increase, compared to neighboring Pennsylvania where the minimum wage did not change, found no evidence of employment decline in New Jersey. This study, which won David Card a Nobel Prize in economics in 2021, was methodologically innovative in using a natural experiment rather than cross-sectional data to estimate employment effects and produced results that contradicted the standard prediction. It was also contested, and a literature developed examining whether its conclusions held up with different data and methodologies. Subsequent research using similar quasi-experimental approaches, including comparison of counties on opposite sides of state borders with different minimum wage levels, has generally found small or negligible negative effects on total employment from moderate minimum wage increases. Research by Cengiz and colleagues using an event study design that examines the distribution of wages following minimum wage increases finds that increases raise wages for low-wage workers with minimal overall employment effects, consistent with the view that monopsony power in low-wage labor markets gives employers some capacity to absorb wage increases. The Seattle Minimum Wage Study, which examined Seattle's rapid minimum wage increase toward 15 dollars per hour, produced more mixed findings. Research by University of Washington economists using highly granular payroll data found that while the number of minimum wage jobs increased, hours worked per worker declined significantly, resulting in lower total earnings for some low-wage workers. Research using different methodologies by UC Berkeley economists using restaurant industry data found no significant employment effects. The divergence between these studies highlights how methodological choices can affect findings and has driven ongoing debate about the best methods for evaluating minimum wage effects. Effects of minimum wage increases on specific industries are better documented than effects on total employment. Research consistently finds that minimum wage increases reduce employment in highly automatable, labor-intensive industries and in geographic areas with lower wages and thinner profit margins. The restaurant and retail industries have received the most research attention, with evidence of menu price increases, reduced hours, and in some cases investment in automation following significant minimum wage increases. These industry-specific effects are consistent with economic theory even when total employment effects are small. Effects on poverty and income distribution are a central concern in minimum wage policy debates. Research on minimum wage increases and poverty finds positive but modest effects, because a substantial share of minimum wage workers are not in poor households: they may be teenagers with higher-earning parents, or secondary earners in households above the poverty threshold. The Earned Income Tax Credit, which provides refundable credits to low-income working families, is generally considered more precisely targeted to poor households than the minimum wage. However, minimum wage increases in combination with the EITC may produce synergistic effects on low-income family income. Long-run effects of minimum wage increases are less well-studied than short-run effects. Research tracking employment trends over multiple years following minimum wage increases finds that short-run employment disruptions, where they occur, often diminish or reverse as businesses adjust to higher wage floors. Labor market tightness, which affects how much capacity employers have to absorb wage increases, is a moderating factor that makes the effects of any specific minimum wage increase context-dependent. Regional variation in wage levels means that a federal minimum wage of any single level will have very different effects in different labor markets. Research on the relationship between the minimum wage relative to local median wages and employment effects finds that increases that push the minimum wage close to or above local median wages are more likely to produce employment effects than increases that set the minimum well below local market wages. This finding argues for more geographically differentiated minimum wage policy rather than a single federal level, or for regular indexing that maintains the minimum at a stable share of local wages.