Economic Effects of Minimum Wage Laws

Slapping on higher minimum wages like what’s being demanded of Zomato in India, isn’t a magic bullet and doesn’t really work. This is well studied in academic research and basic economics: – Increased wages increases the price of the service for the end customer. This means lower income localities are the first to no longer afford the service. – The increased cost means less demand. Less demand can actually suppress the net hourly gig workers pay. And less demand can decrease total gig worker jobs. – In the worst case, your minimum wage reduces demand so much that the entity can no longer operate as a business and risks taking away both the jobs and the service they provide. This doesn’t mean regulation shouldn’t exist, but you can’t blindly implement them without studying their effects. Many of the US studies talk about 5-15% wage increases, whereas some are proposing 20k/mo to 40k/mo in India, 100%. No one knows how disastrous those effects could be. Free markets work pretty well. Seattle gig workers study (2025): https://lnkd.in/gm5SrjWm Uber/Lyft Drivers in NYC study (2023): https://lnkd.in/gsg6esZY

PNG’s Wage-Price Spiral: A Warning in Advance I learnt as a physics student that with every action, there is an equal and opposite reaction. PNG’s move to lift the minimum wage from K3.50 to K5.00 by 2026 is a milestone for workers. It acknowledges the struggles of families facing rising costs. But unless we are careful, the benefit could vanish within 12 months of implementation. The risk is a wage-price spiral. When wages rise without productivity gains, businesses react: prices of goods and services go up, landlords raise rents, and transport fares increase and so on. Soon, the extra pay buys no more than before. In an import-dependent economy like PNG’s, where inflation and kina depreciation already squeeze households, this cycle can accelerate quickly, accelerating a race to the bottom. Workers deserve fair wages. But a wage rise alone is not enough. Decision makers must pair it with measures that build productivity, support businesses, strengthen local production, and tackle inflation. Without this, we risk repeating history, with numbers going up on paper, but living standards staying the same, or worsening. I wrote recently about how AI and automation is spurring on a wave of redundancies, replacing millions of jobs globally. It won't be long before PNG businesses respond by automating clerical and white collar jobs. Advances in robotics are also taking over labour intensive jobs. No. it's not science fiction. Humanoid robots are real today and already deployed with 1 robot able to do the work of 10 labourers. The new minimum wage is progress, but it is also a test. Will we match it with reforms that make it meaningful, or will it simply trigger the next round of price hikes and redundancies? The government has made it's move. Businesses will respond.

*Nepal's Minimum Wage Paradox* Nepal’s statutory minimum wage (NPR 19,550) now stands at 1.12 times the per capita income, the fifth highest ratio globally and the highest in South Asia. While the cost of capital in terms of the bank interest rate has fallen significantly in recent months and is likely to remain low until investment demand revives, land and labor remain prohibitively expensive, eroding Nepal’s competitiveness across all three key factors of production. In theory, low-income countries enjoy cost advantages, but Nepal is an outlier, with some of the highest land prices in the world and rising labor costs that outpace productivity. Such policies, while they may look worker-friendly, have unintended consequences: increase in the cost of production, expansion of the informal economy, stagnation in formal employment, and substitution of domestic workers with lower-cost Indian and Bangladeshi labor who are exempt from these rules. This wage rise is especially damaging for sectors where Nepal could build a competitive edge, such as agro-based and endowment-driven industries, which risk losing cost advantages and being hollowed out by cheap imports. While it is true that Nepal has the highest price levels in South Asia (after Maldives), raising wages to chase prices only deepens the cycle. The real policy priority must be controlling structural costs and inflation, while boosting productivity and investment in high-value-added sectors. Without such measures, Nepal’s aspirations for higher growth and employment generation will remain elusive. #minimumwageparadox #structuralreform2.0 #nepalvision2100

The minimum wage debate has raged for years, but fascinating new paper out by Vitor Melo and coauthors around the unintended consequences for job search among employed workers, and more. Research on the effects of minimum wage increases in job search models has primarily focused on unemployed job seekers, predicting that a higher minimum wage would encourage greater job search activity and potentially lead to higher employment by incentivizing firms to open more vacancies. However, recent evidence highlights the importance of on-the-job search, which constitutes the majority of search activity for low-skilled occupations. If minimum wage hikes reduce job search among currently employed workers, the overall effect on job search could be negative, which would challenge the expectation that higher minimum wages increase employment. Using novel data from a major U.S. job search platform covering January 2021 to September 2023, researchers analyzed the effects of unscheduled minimum wage increases in Nebraska and Hawaii. A difference-in-differences approach comparing changes in job search in these states with those where the minimum wage remained unchanged revealed that higher minimum wages did not increase job search. Instead, minimum wage increases were associated with *significant declines in the number of job seekers for low-skilled occupations.* More direct studies of job search intensity have found little evidence of sustained increases in search effort. While some research suggests that workers may initially increase their job search following a minimum wage hike, these effects appear short-lived and do not necessarily translate into higher employment. These new data from online job applications also offer a more precise measure of search behavior. In Hawaii, an 18.8% increase in the minimum wage led to an 11% decline in job search for retail and cleaning occupations and a 13.2% decline for food-related occupations over the following 17 months. Similarly, in Nebraska, a 16.7% minimum wage hike caused a 9.4% decline in job search for retail and cleaning jobs and an 8.7% decline for food-related jobs over the following 11 months. These findings remain consistent across various analytical approaches. The results challenge a fundamental assumption in search and matching models—that higher minimum wages induce more job search. If workers are less likely to look for new opportunities, the expected mechanism through which minimum wage hikes might increase employment is weakened. #LaborEconomics #MinimumWage #JobSearch #Employment #Wages #LaborMarket #Economics #PolicyAnalysis #WorkforceDynamics

When it comes to #production costs, especially #labor, minimum wage proponents tend to focus on #hourly wage. However, they forget that businesses view labor as a component of total revenue rather than hourly. When California implemented fast food wage hike, it ignored business realities in that hourly wage is just one component of total labor costs. In other words, businesses can cope by doing the following: 1. Reduce total labor hours. 2. Increase revenue per labor hour. To do that, reducing labor hours means exactly just that: workers work fewer hours at a higher wage. However, simply cutting hours can quickly compromise customer service. Thus, when all excess labor hours have been eliminated, business next identify all potential substitutions to tasks currently assigned to labor. Simple tasks such as taking orders can thus be assigned to kiosks, which is the classic #capital-labor #substitution effect. After businesses exhaust all potential substitution options and there are still substantial increases to labor expenses, the next option would be to explore potential #automation options, which spurs #technology #innovations. As new innovations come online, this not only allows businesses to cope with higher hourly labor expenses but also potentially eliminate jobs even in areas where no wage hike takes place. One more potential negative: businesses are going to eliminate labor-intensive menu items in favor of those can be automated. In the meantime, businesses can still raise prices if their products or services are compelling. If not, they'd simply assess whether it's realistic to continue to operate. In all of these cases, the outcomes are: 1. Reduced hours. 2. Fewer jobs (especially due to shutdowns). 3. Higher prices. 4. Fewer consumer choices. Hence, in this particular instance, the true minimum hourly wage will always be $0. Consumers will inevitably be worse off. https://lnkd.in/gWsrqXVc

Command-and-Control Economics: Colombia and The Illusion of Power. When economic outcomes become inconvenient, policymakers face a choice. They can adjust incentives, strengthen institutions, or reach for the most seductive tool in politics: command-and-control, the belief that if something is undesirable, it can simply be forbidden. It feels powerful. It signals action. It creates the impression of control. It also fails. Especially with inflation. Inflation is not just an economic issue. It is a social failure. It acts as a hidden and deeply unequal tax. Workers lose purchasing power. The elderly see their savings eroded. Those least protected suffer the most. The problem is that inflation is not a single switch that can be turned off. It is driven by multiple forces: excess demand, rising costs, money expansion, expectations, and exchange rate movements. Trying to control all of these by decree is not policy. It is fantasy. Modern economies learned this the hard way. That is why they rely on central banks. These institutions do not impose control. They shape incentives. By raising interest rates, they reduce demand, limit money creation, and anchor expectations. It is not painless, but it works. And importantly, it protects those who need it most. Stable inflation benefits workers, retirees, and anyone without access to financial hedges. Undermine that stability, and you do not help them. You expose them. Recent developments in Colombia highlight the risks. A 23 percent minimum wage increase in an already inflationary environment will not create real gains. It will translate into higher inflation, higher interest rates, unemployment, or currency depreciation. In every case, the benefit is eroded. The central bank’s response is not the problem. It is the correction. The real problem is the illusion that policy can bypass economic constraints. This illusion exists on both extremes of the political spectrum. Different rhetoric, same belief: control can replace reality. It cannot. Inflation has ended more political projects than almost any other force. Not because it is unpredictable, but because it is unforgiving. Command-and-control does not solve inflation. It hides it, then amplifies it. What looks like strength is often impatience. What looks like control is often denial. And in economics, denial is always expensive to those that governments are supposed to protect.

The Fair Work Commission just approved a 4.75% minimum wage increase. Here's the part nobody's talking about. Great news for workers. A suburban café with 6 staff just had $261 a week added to their wage bill. That's $13,500 a year — closer to $15,000 once super compounds on top. From the first full pay period after 1 July. No warning. No choice. So how does a café owner cover it? Apparently they just... sell more coffee. 20 extra flat whites. Every single day. At $6.50 a cup with a 28% margin — that's $1.82 toward costs per cup. Just like that. Never mind that their customers are also squeezed. Never mind the milk supplier is about to announce increases. Never mind electricity bills, rent reviews, and insurance renewals are all moving in the same direction. Just sell 20 more coffees. Between 6am and 3pm. With the same number of staff. In a café that already has 14 tables. This isn't a complaint about workers getting paid more. It genuinely should happen. The people running your coffee machine at 5:30am deserve a raise. But the idea that a business owner can just absorb a compounding, legislated cost increase with zero lead time, zero support, and zero alternatives — and the answer is simply "sell more" — is genuinely absurd. Some will manage. Most will quietly raise prices. Some will cut hours. And some will close. Holding "my team deserves more" and "the maths is brutal" in the same hand without dropping either — that's not a complaint. That's just the reality of running a business in 2025. #FairWork #SmallBusiness #Hospitality #CaféOwners #BusinessGrowth #WageIncrease

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐭𝐡𝐞 𝐩𝐨𝐢𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐦𝐢𝐧𝐢𝐦𝐮𝐦 𝐰𝐚𝐠𝐞? 𝘋𝘰𝘦𝘴 𝘪𝘵 𝘱𝘳𝘰𝘵𝘦𝘤𝘵 𝘸𝘰𝘳𝘬𝘦𝘳𝘴 𝘰𝘳 𝘥𝘦𝘴𝘵𝘳𝘰𝘺 𝘫𝘰𝘣𝘴 ? The National Minimum Wage was introduced in 1999 with a sensible objective: to ensure that employees were protected from exploitation. At the time, the adult rate was £3.60 per hour, which represented approximately 45% of median earnings. Few would have objected to the principle. Fast forward to today and the National Living Wage (notice the change in nomenclature) stands at £12.21 per hour, equivalent to around 2/3rds of median earnings. That places the UK at the upper end of developed economies, higher than Germany, France, Australia and many others. That raises an interesting question: has the purpose of the rule changed from protection to social engineering and is it destroying jobs rather than protecting them ? To illustrate the point, consider a small independent coffee shop, run by its owner and 3 full-time members of staff paid the NLW. The wage bill alone is c. £76,000 pa and when you add NIC, pension contributions and other mandatory costs, hits a whopping c. £90,000 pa. That £90,000 must be paid before a penny is spent on rent, business rates, utilities, insurance, stock, card processing charges, accountancy fees or, indeed, the owner’s own remuneration. Of course, the answer may simply be that the coffee shop should charge more, but with coffee already over £4 a cup there is a limit to what the market can bear. My point is that these costs have to be borne by someone - either the business or the consumers or, in the end, the jobs market. Whilst I have never found the argument against the minimum wage particularly persuasive, I wonder if we still discussing the same policy that was introduced in 1999? A minimum wage set at 45% of median earnings is a safeguard against exploitation, but at around 2/3rds of median earnings begins to look rather different. It becomes a mechanism through which government influences the distribution of income across the economy. The original question was: what level of minimum wage protects vulnerable workers without materially reducing employment opportunities? The modern question appears to be: what proportion of earnings should be guaranteed to those at the lower end of the labour market, and who should bear the cost? In our coffee shop example you can see how expensive it has become to employ low or non skilled workers and it is evident this is destroying jobs (as businesses are holding back on hiring) and pushing up consumer costs. Accordingly, I think it that the debate would benefit from a little more honesty about what the minimum wage has become. We are no longer simply talking about a floor beneath wages. We are talking about one of the principal instruments through which governments seek to shape economic outcomes. Whether that represents sensible evolution or mission creep is, I suspect, where the real debate lies.

Changes to the minimum wage in the UK’s Autumn Budget will have unintended consequences. From April 2026, the National Living Wage for workers 21+ goes to £12.71 an hour. 1️⃣ More than double the US federal minimum. 2️⃣ Younger workers get sharper jumps too: 18–20 year olds up to £10.85. Sounds like a big win. But the real story is more complicated. For workers, that uplift on paper doesn’t fully translate into spending power. Frozen tax thresholds drag more of their income into taxation. So you get a pay rise that looks generous, but feels smaller in reality. It also creates market distortions. The Resolution Foundation think tank has already warned that the “unnecessarily big” rise for under-21s could make it harder for 18–20 year olds to find work. 3️⃣ Because when you force wages up, some employers simply hire less. Margins shrink. Some businesses don’t make it. And in a global talent market, it lowers the competitiveness of UK workers. Will international employers still be able to afford British talent? If you go back to economic first principles, the pattern is clear: Any policy that creates a gap between what willing buyers and sellers would freely agree on introduces friction. Externalities. And every distortion has a cost: Even when the intention is fairness. 1️⃣ https://lnkd.in/ggvMgajC  2️⃣ https://lnkd.in/gKZ3PNaC 3️⃣ https://lnkd.in/gDEuRxQF

📊 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐫𝐬’ 𝐕𝐢𝐞𝐰𝐬 𝐨𝐧 𝐌𝐢𝐧𝐢𝐦𝐮𝐦 𝐖𝐚𝐠𝐞 𝐒𝐡𝐨𝐜𝐤𝐬 𝐢𝐧 𝐅𝐞𝐝𝐞𝐫𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐁𝐨𝐬𝐧𝐢𝐚 𝐚𝐧𝐝 𝐇𝐞𝐫𝐳𝐞𝐠𝐨𝐯𝐢𝐧𝐚 Pleased to share our recently published research paper “𝘌𝘮𝘱𝘭𝘰𝘺𝘦𝘳𝘴’ 𝘗𝘦𝘳𝘤𝘦𝘱𝘵𝘪𝘰𝘯𝘴 𝘙𝘦𝘨𝘢𝘳𝘥𝘪𝘯𝘨 𝘓𝘢𝘳𝘨𝘦 𝘔𝘪𝘯𝘪𝘮𝘶𝘮 𝘞𝘢𝘨𝘦 𝘚𝘩𝘰𝘤𝘬𝘴 𝘪𝘯 𝘵𝘩𝘦 𝘍𝘦𝘥𝘦𝘳𝘢𝘵𝘪𝘰𝘯 𝘰𝘧 𝘉𝘰𝘴𝘯𝘪𝘢 𝘢𝘯𝘥 𝘏𝘦𝘳𝘻𝘦𝘨𝘰𝘷𝘪𝘯𝘢”, co-authored with Damir Bećirović, Admir Čavalić, Dino Arnaut, and Ema Burić, PhD, and published in Interdisciplinary Management Research XXI, Osijek, Croatia. This paper examines how employers perceive one of the largest minimum wage increases in the recent economic history of the region, following the decision of the Government of the Federation of Bosnia and Herzegovina to increase the minimum wage by more than 60% at the end of 2024. The analysis is based on a survey conducted among 881 companies of different sizes and sectors, with a dominant share of micro and small enterprises. The findings reveal an overwhelmingly negative perception among employers regarding the expected economic consequences of this policy decision. Most respondents anticipate negative effects on employment, investments, liquidity, turnover, and overall business sustainability. The results further indicate that micro and small enterprises perceive the impact of the minimum wage shock significantly more negatively than medium and large companies, highlighting the limited capacity of smaller firms to absorb sudden labor cost increases. Employers also identify young people, women, individuals without work experience, and low-skilled workers as the most vulnerable groups, suggesting that such policy measures may unintentionally exacerbate existing inequalities in the labor market. The study underlines the importance of evidence-based, predictable, and inclusive policymaking when designing minimum wage policies in transition economies. While employers do not oppose higher wages in principle, the majority support wage increases only if accompanied by a reduction in social contributions and a more gradual and balanced policy approach. Full paper also available on RG --> https://lnkd.in/dRJCCJRe #MinimumWage #LaborMarket #EconomicPolicy #SMEs #BosniaAndHerzegovina #FarukHadzic #DamirBecirovic #AdmirCavalic #DinoArnaut #EmaBuric Sarajevo School of Science and Technology