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The minimum wage represents the lowest possible wage that an employer can legally pay its employees. It is a price floor that was originally created with the aim to even out the distribution of income by simply increasing the wage of the lowest paid jobs. Therefore the companies that are affected by the minimum wage are those that offer the lowest-paid, lowest-skilled jobs such as McDonald's (MCD) Dairy Queen and Wal-Mart Stores (WMT).

Companies Affected by Increases in the Minimum Wage

Companies that are most Affected

Of these industries, certain companies may flourish and others may suffer from changes in the Minimum Wage:

Companies that flourish from a Minimum Wage increase

Big Companies

  • high revenues
  • established in market
  • famous name, those with consumer loyalty

Companies that suffer from a Minimum Wage increase

Small Companies (pubs, cafes etc.)

  • low revenue
  • new, unknown in market

Low-skilled Companies

Small, start-up companies who are trying to enter the market and compete with incumbents will be forced to increase the wage of their lowest-paid jobs. This will increase their costs and make it harder to create a profit margin which will help the company grow. On top of this, the increased costs will affect the small company much more than the big company in the industry as it will be a higher percentage cost increase (assuming the small company has a smaller budget). Therefore the relative cost increase due to the Minimum Wage will be higher for the smaller company than the bigger company. So the bigger incumbent companies, although also experiencing these higher wage costs, will gain a comparative advantage over their smaller, newer competitors. Companies that employ a high number of Minimum Wage employees are going to be greatly affected by Minimum Wage changes. A wage increase will increase the wage budgets of these companies more than in other industries so action (such as firings as mentioned below) will be more prevalent in these industries (such as department stores, fast food chains etc.)

Companies Not Affected by Increases in the Minimum Wage

There are many companies/industries that would not be affected at all by the Minimum Wage. These companies are high-skilled, high-paid companies who do not employ anyone around the Minimum Wage level.

Other industries such as Technology (eg. Microsoft (MSFT), Apple (AAPL), Google (GOOG)) and High-End Retail (eg. Masa Restaurant in New York City) will also not be affected as employees are already being paid above the Minimum Wage and thus won't notice any changes.


What effect does the Minimum Wage have on the economy?

Does the Minimum Wage improve the economy and even out the distribution of income or does it actually have a negative effect, resulting in a reduction in employment? Using neoclassical economic theory, one can view the labor market through a demand and supply diagram. The equilibrium wage is the wage at the point where the demand for labor equals the supply for labor.

Image:price_floor.bmp

From the diagram, one can see that as the minimum wage drives up employee's wages, the equilibrium wage will be offset and unable to be reached. This will then cause the demand for labor to fall (to Qd) as companies are unable to afford as many employees and the supply of labor to increase (to Qs) as more people are attracted to working for this higher wage. This creates a disparity between demand and supply and thus induces involuntary unemployment as people want to work but are not able to. On the other hand, economists have argued that the minimum wage does even out the distribution of income, and increases the standard of living for the poorest and most vulnerable class in society. As well as this, increasing the minimum wage will increase the supply of labor as mentioned above and will thus motivate employees to work harder as there are now other people who want these jobs.

So in summary:

Why people believe Minimum Wage increases are good for the economy

  • It increases the living standards for the poorest and most vulnerable class in the economy. [1]
  • It raises the earnings average in the US economy. [2]
  • It stimulates consumption as the disposable income of the lowest paid individuals rise and thus they spend more. [3]
  • It decreases the costs of government social welfare programs as people will need less social security as their incomes increase. [4]
  • Improves moral and work ethic for the lowest paid as they feel like they should now work for the higher wage. [5]
  • It is an alternative to government programs to even the distribution of income such as EITC or negative income tax. [6]
  • Improves the quality and efficiency of labor in the US.

Why people believe Minimum Wage increases are bad for the economy

  • Creates Unemployment through an excess in the supply of labor.
  • It is detrimental for small start-up businesses in Industries mentioned above as the Minimum Wage can help the big companies force out the smaller companies.
  • It can decrease human capital as a higher wage can tempt individuals to enter the labor market instead of pursue further education. [7]

What makes the Minimum Wage move?

The Minimum Wage moves over time to offset the inflationary changes in the economy that affects the real Minimum Wage. However there are other factors that cause the Minimum Wage to move:

  • Segments of the government (such as the Low Pay Commission) can decide to change the Minimum Wage due to changes in the economy and/or how the Minimum Wage has previously been performing in that area.
  • Congress decides if and when they want to change the US federal Minimum Wage. The federal Minimum Wage remained unchanged since 1997 but has recently started to rise again. Big Business lobbyists however maintain an opposition to these rises as they believe that it just makes companies increase their costs to consumers.

Therefore in the US, the majority of changes are state-level and due to inflationary movements or because of previous success of the Minimum Wage.

Recent and Proposed Future Minimum Wage Increases

After the increase to $5.15 in 1997, there was no Minimum Wage increase for a decade however in 2005, Congress sat down to discuss future Minimum Wage increases.

  • In July 2007, the Minimum Wage increased from $5.15 to $5.85
  • On July 24 2008, the Minimum Wage will increase to $6.55
  • On July 24 2009, the Minimum Wage will increase to $7.25 [8]


  1. [sourceURL http://www.epi.org/content.cfm/issueguides_minwage]
  2. [sourceURL http://www.epi.org/content.cfm/issueguides_minwage]
  3. [sourceURL http://www.epi.org/content.cfm/issueguides_minwage]
  4. [sourceURL http://www.epi.org/content.cfm/issueguides_minwage]
  5. [sourceURL http://www.epi.org/content.cfm/issueguides_minwage]
  6. [sourceURL http://213.253.134.43/oecd/pdfs/browseit/8106071E.PDF]
  7. [sourceURL http://www.economist.com/world/na/displaystory.cfm?story_id=8090466]
  8. [sourceURL http://www.marketwatch.com/news/story/federal-minimum-wage-increase-655/story.aspx?guid=%7BE3C83517-9651-4FED-9213-24CE2151A2E2%7D&dist=hppr]
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