The Potential Economic Impact of Increasing the Minimum Wage in Massachusetts The Potential Economic Impact of Increasing the Minimum Wage in Massachusetts

By Alicia Sasser Modestino

What are the potential costs and benefits to Massachusetts in raising its minimum wage? In 2006, the Commonwealth's legislature considered a proposal that would increase the state minimum wage in two steps over the next two years to $8.25 per hour by 2007. Since the introduction of House Bill No. 3872 at the end of 2004, there had been considerable debate over its potential benefits and costs. Advocates on both sides of the issue have each released a report on the bill's likely economic impacts. Proponents assert that the purchasing power of the minimum wage has declined over time and that the negative impact on employment from raising the minimum would probably be small. Opponents argue that an increase would boost costs for employers, potentially resulting in higher prices for consumers, significant job loss among low-wage workers, or making Massachusetts less competitive with neighboring states. Given these competing arguments, what is the overall economic impact of this proposal likely to be?

In this report I review the arguments on both sides of the issue. In doing so, I discuss and critique, where applicable, the evidence presented in the two reports that have been issued on either side of the debate. I also produce my own projection of the likely impact of raising the minimum wage on aggregate employment and wages. These calculations use the two reports as a baseline, modifying some of the assumptions to better reflect evidence supported by the economic literature. According to my estimates, the current proposal to increase the minimum wage could have a negative impact on employment ranging from 2,100 to 10,500 jobs, or 1 to 4 percent of workers whose wages would be affected by the bill. On net, the combined impact of the two wage increases would raise aggregate wages by approximately $255 million.

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