Minimum wage has long been a hot topic in politics, with some arguing that raising it would improve the economy. Others argue that all it will do is push prices higher, leaving minimum wage workers in the same or a worse position than they were in before the increase.

For or against a minimum wage increase?

Bank of America Merrill Lynch economists Michelle Meyer and Alexander Lin ran the numbers on the minimum wage hike and discovered that the overall impact it will have on the economy will be rather small. Those who support an increase say it must go up so that workers who are on minimum wage will be able to keep up with rising costs.

On the other hand, small business owners take a huge hit when it goes up, and those who advocate against raising it say it will reduce employment. If they’re right, this would be a troubling trend at a time when the Federal Reserve is trying to boost employment and support U.S. households.  The June jobs report surprised to the upside, but after digging deeper into the numbers, Gluskin Sheff economist Dave Rosenberg discovered that “employment actually declined 119,000 in June and has been faltering now for three months in a row.”

The U.S. Labor Department said the economy added 287,000 jobs in June, marking the best improvement since October and smashing the consensus of 180,000. However, officials revised May lower to an 11,000 gain from the previous estimate of 38,000 jobs added. Rosenberg stated in his July 8 Breakfast with Dave note that net, the back revisions for the last two months show a loss of 6,000 jobs. And then there are the jobs relating to the striking Verizon workers, which amounted to about 35,000 net, he explained. In other words, there’s much more to the jobs story than what the headline beat tells us.

Minimum wage simulations

It will take quite some time for all this noise to clear from the jobs market, but the minimum wage increase only muddies the waters further. The BAML team said their simulations suggest that raising minimum wage could actually reduce employment, undoing any progress that might have been made.

They explained that if minimum wage goes to $10.10 per hour gradually over three years, aggregate wage growth would see an increase of 0.1 to 0.2 percentage points. A $12 per hour wage, after fully phased in after five years, would increase wage growth by 0.2% to 0.4% and assist up to 29 million workers. Setting minimum wage at $15 per hour would accelerate wage growth by 1% to 1.2% and support up to 42 million people.

Minimum Wage

An increase could result in job cuts

On the surface, these numbers sound pretty good, especially since it’s been six years since the federal government raised minimum wage, so some workers are being left behind by inflation. However, there will be a cost in the form of job cuts, according to Meyer and Lin, as employers struggling to pay the higher wages eliminate some positions in order to make up the difference.

They point out that studies have shown that job loss in low-skilled jobs, with a 2007 study conducted by Neumark and Washer implying that a 2% reduction in jobs accompanies every 10% increase in minimum wage. The researchers concluded that between 100,000 and 200,000 jobs were lost as a result of the wage hikes since 2007. While this doesn’t sound like much, the BAML team adds that other studies offer mixed data on the overall impact of wage hikes on the economy. A 2004 study indicated that low-wage workers were actually harmed because even if they didn’t lose their jobs, many saw a reduction in the number of hours they could work.

Meyer and Lin conclude:

“We find that an increase in the minimum wage would support lower-income workers and result in a small boost to aggregate wage growth. However, this would be a short-term adjustment in wages and is not a solution for generating overall wage pressure. In order to see a sustained increase in wages we need the Phillips Curve to kick in—a tight enough labor market should eventually exert persistent upward pressure on broad wages. We believe the stage is being set, albeit slowly, for a stronger increase in wages.”