Let’s solve inequality! Or not…
In 2021, the non-partisan US Congressional Budget Office ran the numbers on a proposal to arbitrarily raise the minimum wage to $15 an hour. This hike was projected to lift 900,000 struggling American workers above the poverty line. However, it would wipe out 1.4 million jobs and ruin the sleep of numerous policymakers and working adults. But why?

According to Fast Company (2026), almost half of all Americans struggle to make ends meet, living paycheck to paycheck (yes, even those earning more than six figures). Given the precarious situation of many wage earners, why don’t governments just crank the minimum wage dial all the way up? If the government decided to increase the minimum wage to €50 an hour tomorrow, everyone would suddenly have enough money to pay rent, buy high-quality groceries, and maybe even splurge on that home wood-fired pizza oven. Wouldn’t this just solve poverty overnight?

The minimum wage–unemployment puzzle
To understand the mechanism between minimum wage and affordability, we have to look at the job market the same way we look at any other market. When the price of something goes up, people tend to buy less of it due to declining demand. In the labor market, businesses are the “buyers” and our time and skills are the “products.” If a government suddenly hikes the minimum wage, traditional economic theory suggests businesses will react defensively. For instance, a small cafe might let one barista go to afford the other two. A large retail chain such as Carrefour might invest considerably and change its strategy to replace cashiers with automated self-checkouts. With a higher minimum wage, the workers who keep their jobs are undeniably better off, but it implies a severe trade-off for those who lose their jobs. Therefore, particularly young or vulnerable workers are left with an income of strictly zero.

In my last article, I argue that economics is the coolest science because economists find experiments in real world events that happen in the messy lab that is our economy. Therefore, textbook theory doesn’t always perfectly match reality.

What do the experts say?
In 1994, economists David Card and Alan Krueger looked at a natural experiment where New Jersey raised its minimum wage by 19% (from $4.25 to $5.05 at the time), while neighbouring Pennsylvania kept theirs flat, creating a sudden change in policy across similar regions and a perfectly viable natural experiment. Traditional theory states that New Jersey fast-food restaurants should have slashed jobs. Instead, Card and Krueger found in their labour data that employment in New Jersey actually increased by about 2.7 full-time equivalent workers per restaurant relative to Pennsylvania.

Now how is that possible? It comes down to human behavior and market imperfections. Sometimes, businesses are already highly profitable and simply absorb the extra cost because innovating, slashing jobs, and losing expertise would be the costlier alternative. Other times, they pass the cost onto the consumer by raising the price of a burger by a few cents. Another factor is that paying workers more makes them happier, more motivated, more productive and significantly less likely to quit. Therefore, the business equation might find that avoiding the constant, expensive cycle of recruiting and training new staff can actually save enough money to cover the higher wages they are now legally obliged to provide.

So, if empirical data proves that mild increases in minimum wages don’t automatically destroy jobs, why do we still hesitate to raise them drastically?

The bigger picture
The scale of the shock dictates and the economic reaction. For instance, a light bump in the minimum wage redistributes a bit of wealth from corporate profits to workers, while not being enough to make layoffs the more profitable option. However, if we push that wage floor a little too high and too fast, the shock no longer lets businesses absorb it through lower employee turnover or slightly pricier burgers. This slight adjustment can then send shockwaves throughout our economy with local shops closing and prices for everyday goods skyrocketing, all while the rest freeze hiring and unemployment increases.

This is the core dilemma of economic policy and why policymakers need to make nuanced decisions by considering all trade-offs and side-effects when adjusting the rules of the society we live in. That’s why there is rarely a magic bullet that fixes inequality without causing a ripple effect somewhere else in the system. Finding that perfect sweet spot is exactly why we need good economics and economists to model slight changes and their associated risks in the economy.