Every time the public debates the need for a minimum wage hike, there’s always the same old story. Unions and civil society organizations call for a living wage, while businesses fight back arguing their hands are tied by the market and such hikes would only cause them to cut jobs. Both sides have sensible reasons to support or oppose increases in the minimum wage, which makes this a very nuanced and challenging debate to untangle. Who’s right?

Well, the numbers don’t lie. A new study found that states and cities that raised the minimum wage offered employees more financial security without forcing employers to cut jobs, as additional wage costs were passed on to consumers.

“A minimum wage increase doesn’t kill jobs,” said Berkeley economist and study co-author Michael Reich. “It kills job vacancies, not jobs. The higher wage makes it easier to recruit workers and retain them. Turnover rates go down. Other research shows that those workers are likely to be a little more productive, as well.”

The counterintuitive effects of higher wages

The federal minimum wage has remained the same at $7.25 since 2009. Since then, the purchasing power has eroded considerably due to rampant inflation. For instance, the inflation-adjusted federal minimum wage in 1968 was the equivalent of $12 per hour in today’s dollars.

However, many states and municipalities have taken matters into their own hands and have set their own minimum wage requirements in their jurisdiction. For instance, since January, the minimum wage in California is $15.5. Similar trends can be observed in Connecticut ($15), Illinois ($13), Massachusetts ($15), and New York ( $14.2).

Overall, from 1990 to 2019, there have been some 550 changes in state and federal minimum wages, which have produced observable effects on the job market. The researchers at the University of California, Berkeley, crunched the data from the U.S. Census to measure the impact of higher minimum wages on small, low-wage businesses, a sector that includes restaurants, grocery and retail stores, and childcare operations. 

They came to a straightforward conclusion: minimum wage hikes don’t kill jobs.

Many businesses are worried that minimum wage cuts will hurt their bottom line and force them to fire workers. However, Reich explains that managers need to take a step back to see the bigger picture. It’s not only their business that is affected by such policies but their entire industry. What this means is that all restaurants, for instance, will increase prices and pass the additional costs to consumers. The price hikes are usually incremental and small, so consumers aren’t driven away.

The researchers found that businesses in a low-wage-heavy industry that had to comply with increases in minimum wage experienced less employee turnover, which saves money on recruiting and training. Overall, the bottom line of these businesses is not harmed.

However, there is one scenario in which minimum wage hikes led to lower employment. Only employment among high school-age workers in small businesses fell. The higher pay means that teenagers can work less and have more time to study, so they may voluntarily work only part-time or quit after a brief period of employment to focus more on school. Previous research showed that every 10% increase in the minimum wage among students of low socio-economic backgrounds is linked to an equal 10% reduction in the high school dropout rate.

“We worked on this new paper because we continually heard that small businesses are especially vulnerable to higher minimum wages,” Reich said. “I heard that from a prominent member of the U.S. House of Representatives when I testified at a hearing in 2019. I’ve heard it from the National Federation of Independent Businesses many, many times. For some people it’s a given — but it’s not supported by the evidence.”

Here is an updated overview of the minimum wage for every state in 2022 versus 2023.