The classical school of economics makes it clear that any increase in the cost of unskilled labor will cause a decrease in the demand for that type of labor. Therefore, increasing the minimum wage will cause unemployment to increase. Of course, the U.S. economy is too complex to be that easily explained. Since the minimum wage was first imposed in 1938, the demand for unskilled labor has increased greatly, although it does beg the question of how much MORE demand would have increased, if we still paid workers a minimum wage of 25 cents per hour like we did in 1938?
Some pundits argue that the government must establish a minimum wage, since unskilled workers don’t have the benefit of unions to protect them. They also argue that the time to raise the wage is when the economy is improving and business has greater ability to absorb the increased costs by increasing prices, which would be now.
The demand school or Keynesian school of economics argues that increased spending by unskilled labor will help business, thus creating more demand for unskilled labor.
A recent analysis by Bloomberg concluded that the current debate about increasing the minimum wage is a great deal of words and emotions spent on something that is really not very important. Increasing the minimum wage doesn’t help unskilled workers as much as expected nor hurt small business profits as much as expected. I think that is correct.
As for me, if 76% of Americans approve of helping the 2% of Americans who are actually earning the minimum wage, then why should an economic agnostic like myself preach classical economics?