Politicians worldwide have found a popular tool to combat inequality: raising the minimum wage. It's a policy that appears to cost governments very little while winning public favour. However, a growing body of research suggests this approach may be doing more harm than good, leading economists to reconsider their once-enthusiastic stance.
The Global Surge in Minimum Wages
From Europe to North America, the push for higher pay floors is undeniable. Britain is expected to announce another increase in its minimum wage in its late-November budget, continuing a trend that has seen it jump from 48% to 61% of the median income in just a decade. Germany, which only introduced a national minimum wage in 2015, witnessed its rate surpass 50% of the median income by 2023. In the United States, while the federal rate has been stagnant at $7.25 per hour since 2009, Democratic-led states and cities have taken matters into their own hands. The average effective minimum wage across the country is now around $12 per hour, with some areas, like New York, seeing figures as high as $21.
The Unseen Economic Distortions
Initially, economists celebrated that moderate minimum wage hikes did not lead to the massive job losses they once feared. But this consensus is now fracturing. Scholars are identifying several negative consequences that don't immediately show up in unemployment data.
One major concern is that job losses can be delayed. A study on Seattle's significant wage increases in 2015 and 2016 revealed that hiring in the low-wage labour market slowed by approximately 10%, even if current workers kept their jobs.
Another critical finding is that higher minimums can degrade job quality instead of eliminating positions outright. When employers are forced to pay more but still have a large pool of applicants, they may compensate by cutting costs elsewhere. New research links substantial minimum wage increases to shorter or more unpredictable hours, a rise in workplace accidents, and a reduction in benefits like health insurance.
There is also a risk of overconfidence. While moderate wage floors can counter the power of large employers and actually make jobs more plentiful, pushing too high has the opposite effect. A recent peer-reviewed study estimates that the ideal average minimum wage in the U.S., accounting for employer market power, should be under $8 per hour.
Better Tools for Fighting Poverty
The minimum wage is increasingly seen as a blunt instrument for redistribution. It is poorly targeted because many minimum-wage earners are not living in poverty; they are often secondary earners in higher-income households. Furthermore, when companies raise prices to cover increased labour costs, it is the poor who feel the pinch most acutely. One paper suggests this effect is more regressive than sales taxes.
This creates a dangerous cycle: higher wages lead to higher consumer prices, making life less affordable for everyone, including the low-income workers the policy was designed to help. The promise by New York's mayor-elect, Zohran Mamdani, to raise the minimum wage to $30 by 2030, for example, would likely cause significant price increases in an already expensive city.
Economists suggest there are more effective and less harmful alternatives. In-work tax credits can be better aimed at the genuinely poor. If funded by growth-friendly taxes, they are less damaging to the overall economy. Though they lack the political appeal of a simple wage mandate, their costs are not hidden in higher prices for consumers. After a decade of aggressive increases, the responsible path forward is not to push for more, but to stop.
