Do minimum wage hikes result in job losses? It depends on the labor market

For example, in small towns where a single factory or retail chain employs most of the population, a higher minimum wage can reduce worker turnover, increase productivity and even attract more people to seek jobs locally. The net employment effect of a minimum wage hike in those contexts will likely be positive — that is, up to a certain point. Once the minimum wage is on par with marginal productivity, these positive effects can start to diminish.

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But in less concentrated labor markets (where there are more employers hiring than employees looking for jobs), we found that minimum wage increases tend to have less dramatic effects. That’s because employers are already paying wages closer to workers’ productivity levels. When the minimum wage rises, some businesses may reduce hiring, trim hours or adjust benefits to offset higher labor costs. But even then, the negative impact is small — confirming decades’ worth of research showing that moderate increases in minimum wages rarely lead to widespread job losses.

What does this mean for policymakers?

Understanding labor market concentration is crucial for companies evaluating the potential impact of minimum wage policies. Businesses in highly concentrated markets may find that raising wages enhances worker retention and productivity, ultimately justifying higher labor costs. By contrast, companies in less concentrated markets may need to get creative to expand their workforce — it won’t depend solely on salaries.

This means that a universal approach to minimum wage laws may yield uneven outcomes for firms operating in varying contexts. Retail giants, for instance, are often present in both concentrated rural areas and competitive urban markets. Local governments, then, should use labor market data to set region-specific minimum wages, ensuring that the policy achieves its intended goals without unintended consequences.

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Our findings show that minimum wage hikes are not just about numbers — they’re about understanding the market dynamics that shape economic outcomes.

This also suggests broader implications for addressing inequality: By focusing on concentrated labor markets, policymakers can target areas where workers are most vulnerable to low wages and limited job opportunities. These interventions could not only boost income but also promote economic mobility in underserved communities.

In the ongoing debate over minimum wage policies, our research provides a critical insight: Labor markets are not one-size-fits-all. Recognizing and responding to these differences are key to crafting policies that work for businesses, workers and the economy at large.

José Azar is a visiting Professor of Economics at IESE and Assistant Professor at the University of Navarra. He specialises in antitrust issues, corporate governance and has done research on labor market concentration.