IZA World of Labor

Do minimum wages stimulate productivity and growth?

Minimum wage increases fail to stimulate growth and can have a negative impact on vulnerable workers during recessions

San Diego University, USA, and IZA, Germany

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Elevator pitch

Proponents of minimum wage increases have argued that such hikes can serve as an engine of economic growth and assist low-skilled individuals during downturns in the business cycle. However, a review of the literature provides little empirical support for these claims. Minimum wage increases redistribute gross domestic product away from lower-skilled industries and toward higher-skilled industries and are largely ineffective in assisting the poor during both peaks and troughs in the business cycle. Minimum wage-induced reductions in employment are found to be larger during economic recessions.

Estimated effect of a 10% increase in
                        minimum wage on low-skilled employment

Key findings

Pros

Minimum wage increases are more likely to deliver income gains to low-skilled workers during peaks rather than troughs in the business cycle.

Increases in the minimum wage may stimulate macroeconomic growth if productivity is shifted toward more highly-skilled sectors, possibly by inducing additional training for low-skilled workers.

When increases in the minimum wage are indexed to inflation they do not appear to have larger adverse employment effects than non-indexed increases.

Cons

Increases to the minimum wage redistribute the composition of industry-specific productivity in ways that harm some low-skilled workers rather than produce net economic growth.

Minimum wage increases reduce employment more for less-skilled individuals during times of macroeconomic recessions as compared to expansions.

Minimum wages are not well targeted to poor or near-poor individuals across the business cycle.

Minimum wage increases are ineffective at reducing poverty during both business cycle peaks and troughs.

Author's main message

Empirical evidence provides little support for claims that higher minimum wages will: (i) serve as an engine of economic growth by redistributing income to workers with a relatively high marginal propensity to consume; or (ii) alleviate poverty during economic downturns. Therefore, policymakers wishing to aid low-skilled workers during recessions, or to spur economic growth, should not look to the minimum wage as a policy solution. Rather, means-tested, pro-work cash assistance programs and negative income tax schemes can deliver income to the working poor far more efficiently.

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