If you’ve been following the news beyond what’s happening in Sochi, Kiev, and Syria, you’ve almost certainly noticed the recent debate about raising the minimum wage, sparked by President Obama’s State of the Union speech in January. The debate sharped with a report by the Congressional Budget Office this week predicting that a minimum wage hike would raise 900,000 families out of poverty but would cost 500,000 individuals their jobs.

So what effect, exactly, does raising the minimum wage have on unemployment? The traditional analysis is that a minimum wage is just another type of price control. Specifically, it’s a price floor: the government requires that the price of good not drop below a certain number. If the price floor is set above the current market price (what’s referred to as a binding price floor), the price will be so high that demand will drop, supply will increase, and we have an artificially created surplus. So the idea here is that a suitably high minimum wage might attract more people into the labor force than there are now, but employers who have to pay the higher wage are going to cut back on workers to keep their payrolls low, resulting in greater unemployment and fewer people employed overall.

However, things are not so simple when it comes to the labor market. For starters, there aren’t a lot of substitutes for labor, as least in the short term. Thus, a fast food restaurant can’t really buy a machine that will take your orders, prepare and wrap burgers, pull fries and nuggets out of the frier, etc. Right now, developing and purchasing such a machine will cost more than the human labor that does it now. If the fast food place reduces it’s work force, then it will suffer from being slower in food delivery. Believe it or not, it’s speed, not quality of food, that fast food markets really sell. Therefore, there is only so much a fast food restaurant can do to cut it’s work force before it starts losing more money than if it just kept its workforce the same and paid the higher wage.

Another complication is that the minimum wage workers of the world don’t save much of the income, which is a combination of the facts that most are younger workers (who rarely save) and that minimum wage puts you below the poverty line (so you can’t afford to save because you have to use all of your income to live). This means that any increase in the minimum wage translates into more money being spent directly, effectively translating was previously profit for the employer, which was being partially saved, into income for the worker, which is being spent at or near the rate of 100%. At that point, the multiplier effect (which I talked about in this SLACE post) kicks in, and the overall economy grows.

So how do these competing economic forces shake out when the minimum wage is actually raised? In a now famous study by David Card and Alan Krueger, the found that a minimum wage increase in New Jersey in 1992 actually increased employment at New Jersey restaurants. Economists have argued back and forth about the effects of a minimum wage ever since, without a true consensus about what the effect is. However, what is certain is the effect is definitely not one of simply increasing unemployment without any beneficial economic effects.