Why do some states and cities have a higher minimum wage?
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Is it possible to earn less than the minimum wage?
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What do other countries do about the minimum wage?
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Does the minimum wage cause unemployment?
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How is it possible to increase wages without reducing employment?
John Schmitt, an economist at the Center for Economic and Policy Research, has a useful summary of 11 different potential explanations. Schmitt concludes that four are most important:
Turnover. A higher minimum wage makes working at the minimum wage more attractive. That makes it easier for employers to hire and retain workers, reducing turnover in employment, which is usually high in low-wage industries. The reduction in the cost of turnover offsets the increase in the cost in wages. Underlying this view are the economics ideas of "monopsony" and "labor-market frictions" — that is, that the labor market isn't perfectly competitive, and employers have some power to set wages. A higher minimum wage forces employers to raise wages rather than tolerate vacancies.
Efficiency. Employers respond to a higher minimum wage by raising expectations for their workers' productivity. Though the wage may have risen in dollar-per-hour terms, the business may squeeze more work out to compensate. A related idea is that of the "efficiency wage" — that is, employees themselves may respond positively to a higher wage by more work effort.
Wage compression. Employers of minimum-wage workers usually have a defined pay scale for all employees. When the minimum wage rises, employers respond by holding down wages for workers higher up the pay scale to keep labor costs down. The busboys get a raise this year, in essence, because the maître d' didn't.
Prices. When labor costs rise, employers have three general options. They can pay the costs out of their own profits. They can cut costs in other areas. Or they can just pass on the higher costs to their customers in the form of higher prices. When the minimum wage rises a dollar, so might the price of your haircut.
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Would raising the minimum wage help the poor?
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Who loses from a higher minimum wage?
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Can I survive on the minimum wage?
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Why not set the minimum wage high enough to make everyone rich?
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Can raising the minimum wage stimulate the economy?
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What do economists think about the minimum wage?
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Why do economists disagree about the minimum wage?
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Are there other ways to boost low-wage workers’ incomes?
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