Economic Effect of Raising the Minimum Wage

Free Economics Essay Sample on Problems with Minimum Wage and Economics


Minimum wage is about the minimum rate per hour that a worker should be compensated for labor. It is put it in place by the federal statute, and employers running businesses that affect interstate trade are expected to abide by it. The minimum-wage law in the United States requires for overtime compensation and it has child labor restrictions. It was established because of the increasing public outcry over the growing number of companies that paid very little money to immigrants, women, and young children for their labor. The U.S president Barack Obama is on record for supporting the increment of the federal minimum wage to at least $9.50 per hour. However, constant increases of minimum wage harbors a negative outcome on the economy. This paper focuses on analyzing the economic effect of raising the minimum wage on Texas State.

Economic Overview of Texas

According to the estimates of the 2014 census population, it was recorded that the number of residents in Texas increased by more than 451,320 individuals (Texas Wide Open for Business 2). The increase is perceived to be more as compared to any other state in the United States of America. Between the years 2013 and 2014, it is accurate to assume that the population of Texas state increased by more than 26.9 million people (Lebergott 164-190). This implies that regardless of the fact that increasing the minimum wage would be of benefit to residents, there is a likelihood that several individuals would be left jobless.

On the issue of income, the Bureau of Economic Analysis ranks Texas number 5 for the change percentage in terms of income growth between the years 2013 to 2014. The agency also ranks Texas number 2 for the overall state personal income at just more than $1.2 trillion and no 24 on the national sphere for per capita personal income which stands at $45, 42 in 2014, an upfront growth from $43,552 in 2013 (Vedder and Gallaway 54). This is generally an indication that the economy of Texas is favorable and that the income level grows as well (Texas Wide Open for Business 3). Therefore, these factors, alongside the favorable standard of living, do not warrant or justify the need for minimum wage in the state.

Arguments against Increasing Minimum Wage

There is no doubt that increasing minimum wage has the potential of improving the wages of low skilled employees. However, this occurs at the expense of other factors of production, for instance, capital or high skilled workers. It may as well lead to involuntary unemployment, hence harming the welfare of employees who are subsequently laid off. The main shortcomings of minimum wage are as follows.

Increasing minimum wage costs the economy many jobs. The most important law in economics is that of ‘supply and demand’ (Hazlitt 234). In labor terms, it implies that if compensation goes up, so does supply of workers for that job, which subsequently leads to lower demand for workers by employers because the wage has gone up. For instance, if a caretaker job is advertised, paying $80 an hour, thousands of job seekers would want the job, but if it were $2, few or none would want the job. This means that if an employer is forced by the government to pay minimum of $7 an hour, he may decide not to hire a caretaker, but rather assign the tasks to another staff, hence a job would have been lost due to the minimum wage (Lebergott 164-190).

Small enterprises might become bankrupt. Neumark and Wascher point out that some companies cannot afford to pay minimum wage increases, and this has led to more than 90% of companies closing only few years after opening up (497). For instance, if a small supermarket store opens up, competing with companies such as Wal-Mart and prices its products slightly higher, but it has better services to make up for that, the increase in minimum wage pushes up its operating costs. Furthermore, if it raises prices to cover costs, it may go out of business by losing customers to competitors like Wal-Mart (Vedder and Gallaway 54).

Increasing minimum wage leads to job outsourcing from countries with cheap labor. For example, some companies will outsource to cheaper foreign workers from such countries as China. This is done in order to cut costs since increased minimum wage will make it harder for them to operate. Failing to outsource and cut costs to a level that is at par with foreign business rivals might lead to them going out of business (Sherk 2).

Increasing minimum wage has little effect on low-income earners. In this respect, companies will be reluctant to hire new workers because of the minimum wage requirement. When labor markets become competitive, increasing minimum wage might lead to unemployment since companies will require fewer workforces, and an increase in remuneration package will attract many people to work there. It is also apparent that minimum wage does not benefit the poorest in society. In this context, minimum wage fails to increase the income of that category that earns the lowest since they mostly depend on benefits. Therefore, minimum wages cannot affect them (Neumark and Wascher 497-512).

Increasing minimum wage harms charitable organizations. Charitable organizations mostly hire workers to provide counseling services, legal assistance, cleaning, and organizing donations among others and at times employs volunteers. Some cannot afford to pay huge amount of money such as, for instance, $7 per hour pay rate requirement, and if they are forced, the non-profits might be dissolved.


Coppola points out that the minimum wage is important since it bestows responsibility on firms to ensure that they pay reasonable amount that can support their workers. If an organization is unable to pay its workers enough money to support them, then it should be considered not a viable business and should be closed down. This might happen because it is dependent on wage subsidies (Coppola p.1). Another argument for increasing minimum wage is that there is little incentive for organizations to increase wages willingly, considering the high rate of unemployment in the country. On the other hand, workers also do not have the incentive to demand higher pay for fear of being terminated from their jobs. According to these people, minimum wages and subsequent increases are, therefore, necessary to prevent wages from drifting down the subsistence level (Ghellab 98).


In the context of Texas and many other states in the USA, many firms already provide benefits alongside regular wages to support their workers. Moreover, there are already unemployment benefits in place for those with no jobs. It, therefore, makes no sense to exploit employers for the excuse of unemployment. One can always rely on unemployment benefits until he or she finds a job that can support him and or the family.


In essence, the demerits of minimum wage cut across the entire economy and their increases make them worse. It affects not only individual workers, but also businesses and even governments. The government should allow market forces of demand and supply to take centre stage. Companies and organizations should be allowed to negotiate payment terms with their employees and come up with an agreement on wages that both parties are comfortable with. This should encourage competition since people will want to be employed by an organization or company that remunerates fairly when compared to another.

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