1. Direct and Indirect Effects of Minimum Wage Policy:
An Examination of Minimum Wage Policy Trends
By Mark Houle
University of Dallas
Economics Department

2. 2
In the United States, minimum wage policy debates rage between two extremes: immediately
raising the minimum wage or keeping it the same. However, no viewpoint seems to effectively examine
the assumptions incorporated into theoretical claims about the effects of minimum wage changes, and
they often fall short in examining the full set of effects of minimum wage for the lives of the working
poor. There are two prevalent viewpoints: Advocates for an increase in minimum wage claim that an
increase will provide better quality of living and more disposable income for low-income families, whilst
advocates of keeping the minimum wage where it is claim that raising the wage will lead to higher
priced goods, higher living costs, and an increase in unemployment for minimum wage workers. To
effectively help low-income and working-poor populations, various minimum wage views must be
examined with respect to demographics and economic theory. In this paper, both negative and positive
effects of an increase in minimum wage, along with other proposed viewpoints are examined to
determine how different policy viewpoints are likely to impact the working poor.

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1. Who is the Population Likely to be affected by a Change in the Minimum Wage?
To understand different minimum wage policies, it is
important to account for the population most directly affected.
According to the Bureau of Labor Statistics, there are 75.9 million
workers age 16 and over paid at hourly rates1
. Of those workers,
3.3 million, or 4.3%, are paid at or below the federal minimum
wage of $7.25. As shown in Fig 1, of those 3.3 million workers,
22% work in food serving and preparation jobs—tips included.
Therefore, those 22% of workers are likely to make above
minimum wage when considering total take-home pay. The
remaining workers who actually make at or below the federal
minimum wage is thus roughly 2.574 million. About 5% of Black
workers, 4 percent of White workers and Hispanic or Latino
workers and 3 percent of Asian workers earned the federal minimum wage or less2
. Of all the workers
earning minimum wage and below, about half are 25 years old or younger.
Assuming no government benefits such as SNAP, and a 40 hour work week for 52 weeks, an individual
subsisting off minimum wage earns at most $15,080 per year. Current minimum wage models, generally
assume that individual wage workers are above the poverty threshold, which is possible only for single
member households who are fully employed. However, roughly 47% of minimum wage workers are
married and/or have multiple dependents. When spread across a family of four, the annual salary of a
minimum wage worker would amount to a mere $3,770 per year per person in the family. Even
accounting for a dual-earner household, maximum total household income from minimum wage
1
http://www.bls.gov/opub/ted/2014/ted_20140403.htm
2
http://www.bls.gov/cps/minwage2013.pdf
1
19.2
3
3.121.7
10.2
9.5
7.9
3.7
Fig. 1. Percentage of Hourly Paid
Workers at or Below the Minimum
Wage, by Occupation, 2013
Professional and related occupations
Service occupations
Healthcare support occupations
Protective service occupations
Food preparation and serving related
occupations
Building and grounds cleaning and
maintenance occupations
Sales and related occupations
Other
Production, transportation, and
material moving occupations

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employment is only $5,910, or 24%, above the of the poverty threshold for a family of 4. Furthermore,
many minimum wage jobs are seasonal, don’t offer the opportunity to work 40 hours every week of the
year, and do not provide significant sick and vacation benefits, so that any time off reduces the annual
income proportionally.
This national labor data is consistent with the story that is illustrated by candid remarks made by
clients at Crossroads Community Services, the largest nonprofit food distributor in Dallas County, TX.
After two months working in client intake, the most recurrent type of client observed was either African
American or Hispanic. Most of those clients were between the ages of 22-40 years old, were married,
and had children. A few clients, in addition to supporting their children, were also supporting older
members of their families such as grandparents. These families, most with at least 2 small children, were
commonly making $2000 per month for the entire household (equivalent to $24,000 per year).3
Both
parents usually worked, and when asked, the clients revealed they did work in minimum wage positions.
At $2000 dollars a month, a family of four is $250 below the annual poverty threshold and it would take
an additional $7275 in annual income before the family’s children no longer qualified for free and
reduced price meals at school. In conversation with a client, one responded “Look, I know my work isn’t
that important, I mean, I don’t have a college degree or nothing. What I do have is my kids, and I can’t
support them like this. It isn’t about me it’s about them.”4
On July 28th
, 2015, there was a dual-earner
client household that earned a combined income of $2300 a month, yet the total household was
composed of 8 people, 6 of whom were under the age of twenty. That’s $27,000 per year. For an 8
person household, the Poverty Level Threshold is $40, 890. The family also received food stamps for
$300 per month. Factoring this in, this family was living below the poverty threshold by at $10,290
3
Note this is one of the median numbers. The highest client household income I personally saw was $3,000.
4
This quote was taken from a client conversation—I wrote it down as soon as he was finished in intake.

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whilst supporting 8 people off of two minimum wage positions. The social effects of insufficient income
to support children in working families should not go overlooked.
In contrast to an individual, a family reliant on minimum wage is below the poverty threshold.
According to data used to calculate eligibility for Medicare/Medicaid/Chip benefits5
, 2015 poverty
levels are shown in Table 1. According to the most recent government census 14.5%, or 45 million,
Americans lived under or at the poverty threshold. The Census Bureau defines the term “working poor”
as people who work, but nonetheless fall under the poverty threshold or people who are in poverty and
have at least one working family member.6
As stated above, an individual, or even a couple with no child
can live above the poverty threshold if both work at minimum wage. However, as soon as a couple has a
child or adds a dependent who does not work (i.e. either too young, or somehow invalid), the couple is
below the poverty threshold for a family of three by roughly $5,000 (or 25%).7
The 3.3 million Americans
working at minimum wage are thus very likely to be counted in the below poverty statistic.
Furthermore, the poverty level alone is not necessarily the gauge of what a fair living wage should be.
Most federal assistance programs target families up to 200% (or twice)
the federally established poverty level. For example, children living in
households that make less than 130% and 185% of the poverty level are
eligible for the federally funded free and reduced school lunches,
respectively. Abundant research has demonstrated the importance of
these programs for child nutrition and academic attainment suggesting
5
http://aspe.hhs.gov/poverty/15poverty.cfm
6
http://www.census.gov/hhes/www/poverty/methods/definitions.html
7
Note: Income estimations are not reflective of income tax, social security tax, etc.

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the inadequacy of low-income families to support children at incomes near or below the poverty level.8
2. Analysis of Minimum Wage Policy
Recent policy viewpoints favor raising the minimum wage-- in some states up to as much as
fifteen dollars an hour. Seattle recently enacted a plan to raise the minimum wage to $11/hr with a final
wage target of $15/hr by 2017. California has raised its wage multiple times, most recently in Los
Angeles, up to $15/hr. Two notable studies have analyzed the effects of recently proposed minimum
wage adjustements.
The University of California, Berkeley, using empirical data from previous minimum wage
increases combined with economic models, analyzed the positive effects of raising the minimum wage
in California immediately to $15, in particular addressing the concern of massive layoffs and increased
prices for consumer goods. They came to the conclusion that “businesses are likely to absorb the
additional labor costs of the increased minimum wage with offsets from increased worker productivity,
from declines in recruitment and retention costs, and with small price increases in the restaurant
industry.”9
Overall, price increases are modest: For example, a 10% increase in the minimum wage
increased food prices by no more than 4% and overall prices by no more than 0.4%, significantly less
than the minimum-wage increase itself.10
What this reveals is that in the short run, an increase in minimum wage will help the working
poor11
rise above the poverty level. This is for two reasons: First, income will be immediately increased;
8
For example, Hinrichs (2010) documents the significant long-run health and educational effects of the
school lunch program. Hinrichs, Peter. "The effects of the National School Lunch Program on education and
health." Journal of Policy Analysis and Management 29.3 (2010): 479-505.
9
http://www.irle.berkeley.edu/cwed/briefs/2014-02.pdf
10
“The Effect of Minimum Wage on Prices
11
Term “working poor” defined previously as people who work, but nonetheless fall under the poverty threshold
or people who are in poverty and have at least one working family member

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the capital injection allows a bit of breathing space after household needs such as food, clothing, and
shelter are met. Second, at current technology levels, minimum wage jobs are fairly inelastic—
unemployment increases would be minimal. Food services, at least currently, cannot operate without
large amounts of labor.
In February 2014, the Congressional Budget Office issued, “The Effects of a Minimum-Wage
Increase on Employment and Family Income,” that explores two scenarios: Raising the minimum wage
to $10.10 or to $9.00. The report concluded that there are distinct trade-offs. Under the $10.10
scenario, there would likely be a reduction of about 500,000 workers across the labor market, but about
16.5 million low-wage workers would see substantial gains in their earnings in an average week. Under
the $9.00 scenario, the labor force would see a reduction of 100,000 jobs, while an estimated 7.6 million
low-wage workers would see a boost in their weekly earnings. To compensate for the increased cost of
labor, prices will slightly increase. Depending on the wage increase, 16%-36% of low wage workers
would be lifted out of poverty. This reaffirms the theory that in the short run, many minimum wage
workers would be lifted above the federal poverty level with at least $2,000 more to spare.
3. Economic Theory and the Effects of Minimum Wage Policy
Economic theory can be used to examine the likely outcomes of proposed minimum wage
policy. First, we utilize economic theory to understand how minimum wage adjustments affect
unemployment by examining a simple model of labor supply and demand. Next, we discuss other
economic concepts that are considered in economic analysis of minimum wage: inflation, and
expectations. Finally, we discuss the likely effects of minimum wage adjustments.

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3.1 Supply and Demand for Wage Labor
As shown in Figure 2a, an increase in minimum wage inevitably leads to a long term increase in
unemployment. Under the competitive labor market, W* is the current price and N* is the quantity of
workers. When W* increases to 𝑊𝑊� , the demand for labor decreases from N* to N1. Unemployment
would increase due to the decrease in the demand for labor caused by the increase in labor cost. Basic
price theory reveals that in a competitive market, whenever the minimum wage is raised above current
market equilibrium, the demand for labor will decrease, leaving a portion of the previous workforce
unemployed. However, this effect is somewhat mitigated by the inelastic demand for a majority of
minimum wage jobs as illustrated in Figure 2b. The more inelastic, or necessary a job is, fewer workers
will become unemployed. Also illustrated in Figure 2b is the inelasticity of labor supply. Given the supply
of laborers remains constant, unemployment decrease. An increase in minimum wage with an inelastic
demand for labor combined with an inelastic supply of labor would not lead to mass unemployment.
3.2 Key Economic Variables
The above simple supply and demand analysis may be used to reveal some key points about the
process by which proposed minimum wage policy is examined. First, assumptions matter. In the above
analysis, the elasticity of labor supply and demand was crucial to determining the effects of minimum
wage changes on unemployment levels. Second, the analysis was based on real wage changes. Because
Figure 2a. Supply and Demand
in the Labor Market
Figure 2b: Labor Market with
Less Elastic Supply and Demand
Unemployment
Labor Supply
Labor Demand
W*
𝑊𝑊�
N*N₁ N₂

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minimum wage levels are not inflation-adjusted, in actuality, the constant nominal minimum wage
actually adjusts downwards in real terms each year. Lastly, the above analysis was based on
adjustments to the long-term market equilibrium. It failed to take into account expectations of market
participants that have the potential to cause short-term fluctuations that may be more or less severe
than the long-run equilibrium change.
Elasticity of labor supply and demand
As shown in Fig 2a and 2b, labor supply and demand remain relatively inelastic. In fact, the
supply of labor stays relatively constant, even if the demand for labor changes. As previously explained
using Fig 1, 22% of minimum wage workers are employed in the food services industry, while a further
15% work in maintenance and other services where both supply and demand for labor are fairly
inelastic. In positions such as these, there would not be large increase in unemployment. However, in
industries that are more elastic, such as protective services and personal care (i.e. maids, etc), while
supply of labor would remain inelastic, since the demand is more elastic, unemployment would increase
slightly. Overall, since such a large quantity of minimum wage workers are composed of positions where
a constant supply and demand of workers are required, both elasticity of supply and demand should
remain relatively inelastic.
Inflation

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While the federal minimum wage was only $3.35 per hour in 1981 and is currently $7.25 per hour in real
dollars, when adjusted for inflation, the current federal minimum wage would need to be more than $8
per hour to equal its buying power of the early 1980s and more nearly $11 per hour to equal its buying
power of the late 1960s.12
The red line in figure 3 indicates the minimum wage in real terms (i.e.
adjusted to 2012 dollars), while the blue line indicates the minimum wage in nominal terms (i.e. the
actual dollar amount paid per hour). Since about 1950, each time the minimum wage has dropped
below around $7 per hour in real terms, there has been a policy response to increase the nominal wage
rate. Without these policy responses, real minimum wage rates steadily decline due to inflation.
Expectations
The long-run labor supply-demand analysis does not provide insight into the short-run path by
which the long-run equilibrium adjustments will be realized. Labor economists have long recognized
that human responses to labor market adjustments are far from mathematically rational. In the words
12
http://www.dol.gov/minwage/mythbuster.htm
Fig 3.Nominal Minimum Wage Adjusted for Current Value of Dollar, 2012

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of John Keynes, “there is the instability due to the characteristic of human nature that a large proportion
of our positive activities depend on spontaneous optimism rather than mathematical expectations,
whether moral or hedonistic or economic.”13
Business owners might ignore the statistical data on short
term effects and instead react on what they feel, i.e. an increase in minimum wage will make them lose
money so to compensate they “must” fire some employees. In the short-run minimum wage policy
might give rise to effects best explained by expectations that are not fully in-line with the long-run
equilibrium.
3.3 Examination of Current Minimum Wage Policy Proposals
There are four main proposals that have been discussed in the media and/or political debate
regarding how the minimum wage might be adjusted: downward adjustment, no change, sudden
increase, and gradual increase. We will take each proposal in turn and examine it from the perspective
of economic theory we have now laid out.
Advocates of a downward adjustment have suggested that the market should take care of itself
and minimum wage should drop back down to 1970’s levels of 2.50/hr. This, they claim, would allow for
more employment and so called “charity hires.” However, economists have robustly established that
most minimum wage jobs are characterized by inelastic demand, meaning that wage changes result in
little change to the demand for minimum wage workers. Thus employment levels for minimum wage
workers are unlikely to increase significantly. It is unlikely that a downward adjustment would improve
the lives of the working poor; in contrast, they will likely suffer more.
Keeping the minimum wage the same presents problems and solutions. The main problem with
keeping the minimum wage the same is that it does not account for the increased rate of inflations. The
13
Keynes, John M. (1936). The General Theory of Employment, Interest and Money. London. Macmillan. pp. 161-
162.

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purchasing power of $7.25 is less today than the purchasing power of $7.25 in 2006. Therefore, if kept
the same, minimum wage workers, while getting paid “nominally” the same, are losing “real” money.
Those workers will continue to buy less and less as prices of goods increase but minimum wage stays the
same. However, keeping the minimum wage the same ensures that no jobs will be lost due to increases
in labor costs. Companies will have no reason to lay off any employees due to increases in wages.
A sudden increase in minimum wage also has both positive and negative effects. The extra
money would immediately allow some families to be lifted out of poverty because of the improved
income. Also, it would mitigate the lost buying power of the dollar, by going above the rate of inflation.
However, a sudden increase would cause job loss, even with a relatively inelastic demand for labor,
because company’s business models would be unprepared for the immediate increase and the role of
expectations may cause more extreme short-run effects (because business owners over-react to the
adjustment).
One view that has recently garnered attention is raising the minimum wage through a steady
and structured increase to bring the wage up to a level that is considered a sufficient living wage,
coupled with a long-term strategy to maintain the living wage through annual inflation adjustments. This
is similar to what has been undertaken in Seattle. In Seattle, minimum wage has increased to $11 per
hour, with a plan to steadily increase it to $15 by 2017. Since this proposal has only recently been
enacted, there are no conclusive empirical estimates of its effects on the economy. However, from an
economic theory perspective, the approach seems promising. The steady increase in minimum wage
has several advantages: First, companies would have several years to adjust to the increased labor costs
reducing short-run “over-reaction” effects. Second, it would keep the buying power of the dollar fairly
constant relative to inflation. This would ensure that minimum wage workers are getting paid a fair
wage both in “real” and “nominal” dollars. However, Seattle’s plan falls short of enacting a long-term
plan to manage living-wage adjustments in line with inflation. Additionally, it is possible that the time

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period over which minimum wage adjustments are made may not be sufficiently large to allow for
smooth adjustments, a more gradual approach may cause fewer economic distortions.
4. Conclusions
Overall, minimum wage is an important tool for helping the working poor escape poverty, but it
is a mistake to think that there it is a straightforward fix to poverty. Minimum wage is a complex subject.
The current individual minimum wage worker earns enough to live above the poverty line. Families with
2 or more dependents, even in a dual earner household, live in poverty, thousands of dollars below the
poverty threshold. Additionally, minimum wage has not been adjusted for inflation. This means that
each year minimum wage is left to remain at a constant level in nominal terms, a family living on
minimum wage is able to buy less with the money they earn; in real terms, they become poorer.
When making minimum wage policy, it is important make use of economic theory. First,
economic theory, as shown throughout the brief, reveals the following: large, sudden increases in
minimum wage are ill-advised because they do not give businesses time to adjust their business models
and leave open the possibility of “over-reaction” due the role that expectations play in human decision-
making. Second, economic theory also reveals that the demand for minimum wage labor is relatively
inelastic due to the industries that employ minimum wage workers, i.e. restaurants. Likewise, workers
will always be available to fill these positions, which means that both supply and demand of minimum
wage workers is relatively inelastic, thus reducing the effects of wage adjustments on unemployment.
Third, inflation is not accounted for in the current minimum wage policy meaning that without
adjustments, the minimum wage typically adjusts downward in real terms each year. The current status
quo is not that of a “constant” minimum wage in real terms. In light of these findings, gradual upward
adjustments to the minimum wage seems the strongest viable policy option. These adjustments will

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keep the purchasing power of minimum wage families constant, while also allowing businesses to plan
for increased labor costs.
Policy would greatly benefit from further work analyzing how “gradual” such adjustments
should be to allow sufficient time for businesses to make adjustments and a closer analysis of what level
of purchasing power is sufficient to maintain well-being of working poor families. It is likely that such
work would reveal heterogeneity across the industries and across geographic locations. This closer
understanding will yield more thoughtful discussion of a policy situation that affects the lives of the
working poor and all of us impacted by the economy that the labor of working families supports.
Acknowledgements
This policy brief would not have been possible without the interview process at CCS. Without my work
there, the numbers would have remained faceless. It was truly eye opening to see how hard not only the
clients worked to ensure the well-being of their families, but how seriously CCS upheld their duty to help
society. Working at CCS for 9 weeks was eye opening for me.
Dr. Leonard and the CARe Initiative team were also highly instrumental in the construction of this paper,
both in providing ideas in where to look for material and where to start in understanding the working
poor in relation to the minimum wage debate. All members sparked direct and indirect ideas about this
policy brief.