Donald Boudreaux: Difficult-to-see consequences of minimum wage
Minimum-wage legislation artificially raises firms’ costs of employing low-skilled workers. In consequence, some workers who would have jobs in the absence of the minimum wage are cast by the minimum wage into the ranks of the unemployed.
This understanding was long the consensus among economists. Starting in the mid-1990s, however, some researchers found that raising the minimum wage does not necessarily have a negative impact on employment.
For a quarter-century, a battle royale has raged among economists over whether or not this new research is sufficiently solid to overturn the long-held consensus. Studies of minimum wages continue to pour forth. While a majority of recent studies support the consensus, enough studies dispute it to allow minimum-wage supporters to dismiss as false the traditional economic argument against the minimum wage.
My professional opinion is that the most credible studies are those that show higher minimum wages to be associated with reduced employment of low-skilled workers. But even if I’m mistaken, it’s important to understand that raising the minimum wage can negatively affect workers even if it doesn’t throw any of them out of jobs.
Even the simplest entry- level job is a complex bundle of benefits and requirements. On the benefits side, most obviously, is the wage itself — for example, $7.25 per hour, the current federally mandated minimum wage.
But there are benefits to most jobs beyond the wage. Some of these benefits we might call “formal” fringe benefits, such as employer- paid health insurance premiums. Also common are other, less formal fringe benefits. These include, for instance, free meals, employer- supplied uniforms, employee discounts and opportunities for overtime work.
Looking even more closely, we see that the likes of comfortable break rooms, company picnics, Friday happy hours and employee-of-the-month recognition are also benefits that make jobs that offer these amenities better than those that don’t.
When government raises the minimum wage, employers can reduce the amount of nonwage benefits paid to employees. And so even workers who keep their jobs at the higher minimum wage might nevertheless be made worse off because of reductions in the value of their nonwage benefits.
A similar dynamic operates on the requirements side of jobs. Employers expect their employees to produce enough to make their employment worthwhile for employers. And so if the minimum wage is raised, employers can work their employees harder.
Employers can become more strict in demanding that workers arrive on time and in punishing workers who leave work a few minutes early, or cracking down on personal texting, telephoning and emailing during work hours. This intensified strictness enables employers to get more output per hour from each worker.
In short, employers can respond to hikes in the minimum wage by employing fewer workers, cutting the value of workers’ fringe benefits or working employees harder. Most employers will use some combination of these three options. And to the extent that employers either cut the value of fringe benefits or work their employees harder, they will have less incentive to reduce the size of their workforce.
But make no mistake: Employers will adjust in one or more of these three ways — each of which makes workers worse off.
Donald Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.