Minimum Wage and Unemployment


Although the graph above talks about the U.S. economy, the underlying principle applies to all countries in the world: raising minimum wage may reduce employment. The reason is fairly simple: just like how we purchase clothing given a cerain amount of budget, the higher the price, the less quantity we purchase. Similarily, when labor becomes more expensive, to reach the profit goal, companies also have to reduce hiring people if productivity remains unchanged. 

Moreover, a higher minimum wage makes capital, another production input, relatively cheaper. This is why in many developed countries, more and more machines are being used in production in replace of labor. The choice of labor versus capital is based on their relative cost and abundance. 

With that, it is easier to understand why many developing countries show grave concerns about paying more to their workers. The competition is so fierce in the textile & apparel industry and companies can hardly afford an increase of production cost. The only difference with the case of the U.S. economy is: because developing coutries have no money to capitalize production and apparel manufacturing is labor intensive in nature, therefore, a rising minimum wage will simply result in a shift of production to other places where cheaper labors are available.

Author: Sheng Lu

Professor @ University of Delaware

24 thoughts on “Minimum Wage and Unemployment”

  1. According to unemployment rate projection, if the minimum wage remains at $7.25 the unemployment rate will decrease, while an increase of minimum wage will increase unemployment rate. However, an increase in living expenses and other factors will trigger a demand for higher minimum wages so maintaining the same minimum wage will be hard.
    My mom and aunt both worked in apparel factories back in the 1990s. In the factories lightings were okay but I do not think ventilation was enough. I remember seeing dust floating around under the lights, which is why I saw workers wearing masks to help them filter the air they inhale in. My aunt experienced trouble finding factory jobs as they slowly moved away one by one due to labor costs and other expenses. Many buildings in Manhattan, NY, specifically in the Chinatown area were once dominated by apparel factories in the 90s, but they slowly turned into hotels.
    The ultimate goal of businesses is to make a profit. If a company can decrease labor costs by shipping the work to a developing country, that is what the company will do. Exchange rate between the U.S. and China is about 1 USD to 6.20 RMB. Companies could pay workers in China the same minimum wage they are required to pay workers in the U.S., expect it will be paid in RMB. Paying 7.25 RMB an hour is much cheaper than paying 7.25 USD an hour. From a business point of view, this is why labor had to be shipped to countries where they are abundance in labor and appealing labor wages. In class we’ve learned that labor costs only accounts for about 2% or so for a product we purchase, which is not the main reason why manufacturing jobs are shipped overseas. Companies want to make a higher profit, but manufacturing factories

    1. very good thoughts. I was just watching a PBS documentary on the US fiscal debt. The American people always vote for a presidential candidate who promises “more benefits and lower tax”, despite the two goals are contradictory in the sense of economics. Raising minimum wage could be a politically correct movement, but makes no economic sense either. I hope students can realize the multi dimension nature of issues in the real life, because these are the things you will have to face after graduation and it is far more challenging to deal with than multiple choices in the exam

    2. I liked your response. It is difficult when there are rising living costs and low minimum wages. Companies most likely find what is most cost efficient and make changes accordingly. I understand that most apparel production has been taken overseas because of cheaper labor costs. However, it is a different story when a company is marketing a made in the USA specialty item. I believe that specialized items can be produced in the USA and customers will pay a little more for them, knowing the philosophy of the company and unique style. There is a target market that enjoys purchasing from local designers and shopping at local boutiques for specialty items.

      1. I agree that “niche market” is what US-based apparel companies can focus on. Very unique/specific/small, but lucrative market.

  2. Unemployment and minimum wage are harsh realities of life. I am currently a junior here at URI and the thought of becoming a senior is stressful. Realizing that year from now I will be in the real world and will need a job is scary and the realities of the economy right now aren’t helpful. Retail tends to be one of the jobs that does pay minimum wage. My first year in retail I was making $7.50. By the end of my three years working there I was making $9.50. This was okay because I was a junior and senior in high school, but as a graduate I would expect a much higher wage. There is so much competition for jobs, especially high paying ones. The fact that increasing minimum wage creates more unemployment shocks me, and more importantly scares me!

  3. At first I never really thought that increasing minimum wage would decrease productivity, because I was always taught to work hard for the money I earn so that I can truly say I earned it. However, after discussing this issue in class I do understand why this is so. I liked how acguo527 stated, “an increase in living expenses and other factors will trigger a demand for higher minimum wages so maintaining the same minimum wage will be hard.” That was a very good point. However, I feel that if people demanded higher minimum wages, especially with today’s economy being in financial turmoil, even more US companies’ factories will go overseas and find other factory workers who will work for less money. This could also result in illegal immigrants taking Americans’ jobs and being paid under the table for much less money and more productivity.

    1. good comment~ Think beyond textile and apparel plz. There is always a limit for productivity growth in a sector, but the productivity gap among different sectors could be huge. If the minimum wage reaches a level that cannot ensure profit in the apparel manufacturing sector, for example, the capital will choose to invest in other sectors that can accept such a minimum wage–this is why the industry structure is becoming more and more capital intensive and technology intensive. That’s also why I personally don’t think apparel manfuacturing will never return to the US in a sizable way.

  4. Before I read this, I always questioned why minimum wage wasn’t higher. I believed if everyone got a higher salary the economy would be better. Once I read this article I realized there are a lot more factors behind the minimum wage prices. One factor I didn’t think about was how employment would go down because companies would have to pay more to each employee when they may not have the money too. If people are obtaining a larger salary, machinery and technology will start to look cheaper and easier from the company’s standpoint. It seems like the employees who are getting a low pay are stuck and can’t do anything to help their money situation because if the wage goes up, they may be faced with loosing their job.

    When thinking about this for developing countries, I understand how hard it is for them to pay their workers as well as deal with the constant production costs. They are all trying to compete to become more developed and if they increase their minimum wage, then other countries that trade with them will result in doing trade with a place that has cheaper labor costs. It’s almost like a balance scale with ‘making a profit’ on one side and ‘salary’ on the other. It is hard to balance between the two. Since more wages means more money will be circulating through the markets, the economy will get better, but that means that there will be less money within the company itself, causing it to loose profit. This is why companies try to find cheap labor overseas because it will benefit their profits more.

  5. As a senior and graduating in about a month I am stressfully looking for jobs and figuring out a starting salary. While reading this article I realized that unemployment and minimum wage are the harsh realities of life like oliviahenigson mentioned in her post. I always believed that if the wages were higher wouldn’t the economy be better. But, that is not the case. If the wages were higher that would cause more unemployment because companies would have to pay more for the people working there. Even though I would love for them to increase the minimum wage it scares me if they do because with the increase of higher wages it would increase higher unemployment.

  6. Of course it makes sense that by raising minimum wage, less people would have jobs. There is only so much money to go around, so by keeping the minimum wage where it is, more people can be employed. However, this is still not ideal, as minimum wage is hardly enough to make a living off, especially if a worker is supporting dependents as well as themselves. With the cost of living going up, it is difficult for many people to make ends meet. By the same token, it is unrealistic and viewed as unfavorable to increase the cost of goods that one set of workers is manufacturing, just so that those workers can make more money. The higher cost of goods is likely to affect the number of people buying those goods, and will also affect the financial stability of those consumers whose paychecks have not increased due to this increased price in goods. It is a very delicate balance, and a problem with no great solutions.

    I think that the best thing that we can do for ourselves is to become educated and try to get higher paying jobs. Higher paying jobs are consistently linked with higher education, which is why it is imperative that we receive this education. Unfortunately, education is very expensive, which makes it a limited resource for some. Additionally, those of us who receive this higher education are also burdened by debt after graduating from college, which automatically lowers the living wage we earn upon getting a job, due to the fact that we must begin paying back our student loans.

  7. I found this article to be very interesting. There are so many hardships in todays time especially when the cost of living is raising, taxes are increasing, and more often then not, there are pay cuts. I found it interesting that if the minimum wage is increased than jobs will most likely decrease. My first thought would be that if we raise the amount of minimum wage it would give the opportunity for those to spend more, therefore put the money back into the businesses, create a profit, and in the end create more jobs. But, from a business point of view this would be a decrease in profits in order to pay for the employees and I can understand why it would cause less jobs out in the market.

  8. I could not agree more with the statements made by Kayla. I never realized why my minimum wage was so low at my job over the summers, even though it was rising every summer, it still is something that every college student wishes was higher. Before reading this I genuinely did not take into consideration the thought of having to hire less workers because you will be taking money away from one to put towards another. Larger companies can afford to do so because of the amount of machinery they have, but smaller companies are not capable of doing deeds like this thus far. As for other 3rd world countries, I can understand the competition level they are working at. They are never going to get out of the 3rd world title if they continue producing and hiring at the rate they do, however it is necessary for them to continue doing so to have a say within the T&A complex. They need to pay their workers cheaply, because workers in those such countries are less concerned with the amount of money they are receiving versus them having a job to live off of. Countries such as Bangladesh need these workers to continue producing at the rate they do and to even be producing yarns and fabrics for other countries like the US and China.

  9. This article is extremely relevant since Americans today would like to see more “made in the US” labels. Little do they know, the amount of products made in the US are scarce and still diminishing. As the bar graph shows, if minimum wage is raised, the unemployment rate will rise as well. This is a direct correlation which is not in favor of American citizens. Higher wages means less money companies will have to employ with, meaning less employees or outsourcing all together. While trying to dig ourselves out of this recession we must remember this chart and what it predicts for our future.

  10. This is disappointing to read how the raise of minimum wage will influence unemployment. Most people would be thrilled at the height of minimum wage but the present state of unemployment is so poor we can’t afford to dishearten it anymore. Although this is good news for people with lower wage jobs, I believe it is more important to provide work for the masses. Those with job opportunities in the US are already lucky enough to hold a position. We need to focus on providing work for those without it. We acknowledge how machinery is replacing occupations completed by people. With this crisis occurring the last thing we need is to deplete more working positions. We need to value our employees by maintaining their place, not replacing them with them machinery. Although raising minimum wage will benefit the workers who receive that, I believe we need to not sacrifice any more jobs in the industry.

  11. With the increase cost of living in the United States it is necessary that we as workers are being compensated enough to live. As a graduating senior, it is scary to think that the retail position I hold now will definitely not give me the type of money I need to survive out on my own. It is my wish that it realized by others that we need jobs and by sending all of our jobs overseas and giving them to machines as opposed to people it is not doing Americans any good. Some people would be more than willing to pay extra money to purchase items that were made in America so it is necessary that we bring some jobs back here.

  12. After taking TMD 433 I completely understand the employment and minimum wage chart above. I really wish that with a rise in minimum wage there could be a rise in employment so more people could support their families and have access to a stable lifestyle.
    Unfortunately that is not how it works…
    Like many of the students mentioned above, the cost of living increases every year… If machines take over the textile and apparel world to increase productivity, what happens to the people willing and able to work?
    It is scary to think about what would happen if all of the people who make up the textile/apparel industry in and especially out of the U.S. were completely out of work.
    If we look at it from the retailer or factory owner point of view, I completely understand why they do not want an increase in minimum wage; it would cause a high increase in their costs. The process would be more expensive overall.
    If we look at it from a workers point of view; they need money to support themselves and their families. How do we expect them to live on $40 a month with the constant cost of living increase.

  13. I found it interesting how employment wages can be compared to the purchasing of clothes. Its interesting how high wages makes for more unemployment because you would think it wouldn’t. More and more machines are taking place of our jobs. If you think about it, they are almost everywhere we go and soon enough having that person to person contact will be obsolete. That wont happen to more in time, I think that we need to focus on having a decent and fair wage so people still can be able to get jobs. This also effects me, I think how am I going to get a good job somewhere if it is becoming harder and harder.

  14. This seems like a lose/lose situation. I never really thought before about how an increased minimum wage would create less jobs until reading this article. So basically the question becomes do we pay more people less money, or do we pay less people more money? Either way the same amount of money is being spent on the cost of labor, it is just dependent on how it is divided up. After reading this I think it is almost better to keep the minimum wage where it is because the last thing the world needs is a decrease in jobs and employment. Though the minimum wage does need to rise, I do not think that it should until it can be done in means where jobs are not lost. People are living on these wages now so I guess at the end of the day it is better than having more people go on welfare and creating an even bigger divide between socioeconomic classes.

  15. I agree with Stephanie’s comment above, this just seems like a no-win situation. No matter what happens to try and fix the problem, someone will always be hurt by it. However, I feel like if machines keep replacing people then the cost of minimum wage won’t even be an issue anymore because people won’t have a job anyway. Even though it’s not the best solution, I think we should raise the minimum wage while people still have these jobs because at least they will end up with more money to live off of when they are no longer employed.

  16. There is no happy solution to this issue of unemployment and minimum wage. If minimum wage is raised, the unemployment level rises; if minimum wage remains the same, Americans will never be able to keep up with the cost of living which may force them to give up their car(s) and/or home. Then, there are machines, which are causing human workers to become obsolete. In the end, business is business, and companies will do whatever they can to continue making a profit. This forces them to let workers go, which scares me because my future seems to become more and more uncertain by the second.

  17. It seems like a lose/lose situation. It makes sense that when minimum wages are raised than unemployment rate goes up. But I never really thought about it that way. But if the minimum wages remain the same it will become difficult for people to support their living expenses. Especially if the cost of living rises but wages remain the same. Employers are not willing to pay more workers a HIGHER wage and keep the same amount of people around. They would lose more money that way and not make the same amount of profits. With businesses the most important thing is making a profit. To them it doesn’t matter who gets hurt or loses a job. Making money is the most important for people at the end of the day. Money makes the world go round.

  18. This makes sense to me because companies are given a certain amount of money for their payroll. If minimum wage were to go up, their payroll would not necessarily go up too. This being said, it would make sense for them to use machines for production instead of humans. You only purchase the machine once unlike human services. If manufacturers had the money, it would benefit them to use machines instead of paying human workers by the hour. This concerns me because although it makes sense financially for the companies, for the workers it is a nightmare. I feel as though our generation should not look for manufacturing jobs because at this rate, there won’t be any.

  19. Before reading this article, I never realized that min wage and unemployment have such a close relationship with each other. I never thought that as the need for min wage to increase the likely hood that jobs would be lost would be more of a possibility. Unemployment is such a big issue in this country but even those with a job might not be paid a substantial amount especially enough to live off of. I agree with whatwouldhilarydo when she mentioned that machines are replacing humans because you only need to pay for the machines once. Even though there might be maintenance with machines, it is still a more efficient and productive way of business in some cases. It’s always about the profit and companies sometimes don’t care how they get that.

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