Why Are There So Few Job Losses from Minimum-Wage Hikes?

Economy | Policy Reports

No. 354
Wednesday, April 09, 2014
by Richard B. McKenzie

Both proponents and opponents of federal minimum-wage hikes are convinced that if Congress raises the minimum wage (whether to $9 or $10.10 or $15 an hour) the welfare of tens of millions of low-income workers will rise by a comparable amount. The two sides disagree over the extent of the job losses low-wage workers will suffer, but both sides acknowledge that most econometric studies over the past half-century show that a 10 percent hike in the federal minimum wage results in job losses for unskilled workers of no more than 3 percent, and potentially less than 1 percent. Most recently, the Congressional Budget Office found that if the minimum wage is hiked to $10.10, expected job losses by 2016 will amount to a scant 0.3 percent of the jobs affected.

Those in favor of a minimum-wage increase are willing to accept these minor employment losses for the few in exchange for income gains for the many. But this view fails to recognize that wage income is not the only form of compensation with which employers pay their workers. There are many other forms of compensation, including fringe benefits, relaxed work demands, workplace ambiance, respect, schedule flexibility, job security, hours of work and so forth. Even a limited accounting indicates that these nonmonetary benefits amount to a substantial percentage of the total compensation employees receive, nearly 30 percent over and above wages of all workers and 20 percent over and above wages for restaurant workers, on the average.

Employers compete with one another to reduce their labor costs, and that competition is expressed in a variety of ways in labor markets — certainly in money wages, but also in terms of fringe benefits, work demands and all other forms of nonmoney compensation. Workers also compete for the available unskilled jobs. The competition among employers and workers will not disappear with a wage increase but will merely be redirected into the components of compensation packages not covered by the wage mandate. Wage floors, therefore, restrain competitive pressures in only one of the many ways in which businesses compete. With a minimum-wage increase, employers will move to cut labor costs in other areas. As such, employers are likely to reduce fringe benefits and/or increase work demands.

Indeed, past experience has confirmed the nonmonetary impact of a minimum-wage hike on workers, not only in reduced fringe benefits but in increased work demands and decreased job training. For example:

  • When the minimum wage was increased in 1967, economist Masanori Hashimoto found that workers gained 32 cents in money income but lost 41 cents per hour in training — a net loss of 9 cents an hour in full-income compensation.
  • Similarly, Linda Leighton and Jacob Mincer in one study, and Belton Fleisher in another, concluded that increases in the minimum wage reduce on-the-job training and, as a result, dampen long-run growth in the real incomes of covered workers.
  • Additionally, North Carolina State University economist Walter Wessels determined that a wage increase caused New York retailers to increase work demands. In most stores, fewer workers were given fewer hours to do the same work as before.
  • More recently, Mindy Marks found that the $0.90 per hour increase in the federal minimum-wage rate in 1990 reduced the probability of workers receiving employer-provided health insurance from 66.2 percent to 63.1 percent, and increased the likelihood that covered workers would be reduced to part-time work by 26 percent.

Wessels also found that for every 10 percent increase in the minimum wage, workers lose 2 percent of nonmonetary compensation per hour. Extrapolating from Wessels’ estimates, an increase in the federal minimum wage from $7.25 to only $9.00 an hour would make covered workers worse off by 35 cents an hour.

And if the minimum wage were raised to $10.10 an hour, for example, the estimated 16.5 million workers earning between $7.25 and $10.10 could lose nonmonetary compensation more valuable than the $31 billion in additional wages they are expected to receive.

Employers are certainly capable of responding to wage hikes by making direct changes to the employment status of their workers. They can shift their workforce to noncovered workers (such as unpaid interns) or to automated machines. Or, businesses can import their products from overseas, where workers earn far less per hour than American minimum-wage workers. That the employment effects of wage floors have been so small, therefore, is explained by the reduction in workers’ nonmonetary compensation. Granted, a decade ago researchers found minimum-wage hikes had little to no effect on workers’ fringe benefits, but they considered only the expensive benefits that high-income workers receive (for example, health insurance), and they took no account of the easily obscured work-demand effects of mandated wage hikes (or any of the other nonmoney forms of compensation, for example, job security).

Both proponents and opponents of minimum-wage hikes do not realize that the very small employment effects consistently found across numerous studies provide the strongest evidence available that increases in the minimum wage have been largely neutralized by cost savings on fringe benefits and increased work demands and the cost savings from the more obscure cuts in nonmoney compensation.

Read Article as PDF