Raising the Minimum Wage Doesn’t Kill Jobs; It Boosts Productivity, Says ITIF

February 9, 2021

WASHINGTON—In response to recent proposals to raise the federal minimum wage to $15 an hour by 2025 and following concerns expressed in a study by the Congressional Budget Office (CBO) that such measure would put 1.4 million Americans out of work, the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, released the following statement from ITIF’s President, Robert Atkinson:

As Congress debates whether to raise the minimum wage—and to what level—conventional economic analysis continues to debate the wrong question: Is the loss of jobs worth the improvement in wages for low-wage workers? The CBO study makes the same mistake.

First, the study looks at micro-economic effects from raising the minimum wage. It rightly asserts that if a firm has to pay higher wages, it either raises prices and sells less, or keeps prices the same; in either case, it lays off workers. But job creation is determined in the realm of macroeconomics, not microeconomics. Thus, any decrease in particular firms’ jobs will be made up for by overall macroeconomic forces leading to full employment.

Second, and more seriously, CBO actually estimates that companies would invest less in capital equipment, such as automation, when, in fact, the opposite would happen. Numerous academic studies have shown that higher wages force firms to invest more in capital equipment. When the price of labor is higher, the return on investment from labor-saving technologies increases because such investment helps the firm save more. The opposite is true: when companies know they can employ workers at minimal wages, they have little incentive to invest in automation.Therefore, rather than diminish the U.S. capital stock, a higher minimum wage would boost it and make the U.S. economy expand.

In addition, when firms become more efficient through capital investment, this not only leads to more jobs in the capital goods sector, but also reduces their own costs; those savings raise wages, boost profits, or lower prices (or some combination of the three). In all cases, the savings flow back into the economy, leading to compensating increases in labor demand, creating better jobs.

Whether the minimum wage should go to $15 or $12 an hour, or whether it should be adjusted to the regional cost of living, are important questions. But we shouldn’t be distracted by a faulty analysis that assumes job loss and ignores important productivity benefits.

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Raising the Minimum Wage Doesn’t Kill Jobs; It Boosts Productivity, Says ITIF