Minimum Wage Hikes: Beyond Pay and Jobs
Minimum Wage Hikes Bring Tradeoffs beyond Pay and Jobs
The Narrow View of Minimum Wage Tradeoffs
Common Public Debate Focus: The pros and cons of the minimum wage are typically reduced to a supposed simple tradeoff between earnings gains and job losses.
Benefit Side: A higher minimum wage can lead to increased earnings for workers due to higher hourly wage rates.
Cost Side: Some workers may lose their jobs as firms face higher employment costs.
Deceptively Simple Calculus: If evidence suggests few job losses and many workers receive wage gains, a minimum wage increase is often deemed effective.
Policy Stakes: Analyses focusing on employment effects hold significant weight for policy decisions.
Examples of Employment-Focused Analyses:
Congressional Budget Office (CBO) Report (2019): Titled "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," this report and its interactive tool prominently featured forecasts of earnings and employment effects.
Progressive Labor Advocacy Organizations: Groups like the Economic Policy Institute and the National Employment Law Project also emphasize employment effects, often interpreting evidence more positively for the minimum wage.
Critiques and Broader Framework of Tradeoffs
Advocate Critiques of CBO: Minimum wage advocates, such as economist Michael Reich, argued the CBO's summary of academic studies lacked recognition of scientific quality differences. Economists Jesse Rothstein and Heidi Shierholz claimed CBO was "wrong" based on "modern scientific evidence."
Puzzling Stance: Advocates' insistence that large minimum wage increases have no employment effects is perplexing.
Validation of CBO's Conclusions: A review of empirical literature by economists David Neumark and Peter Shirley found the CBO's conclusions to align with the overall body of evidence.
Evidence of Job Losses: Studies on substantial minimum wage increases regularly indicate significant job losses, particularly for the least-skilled, least-experienced, and least-productive workers.
Beyond the Narrow Framework: Focusing solely on employment effects is too restrictive.
Firm Adjustments: Firms can make numerous adjustments to offset the impact of minimum wages on their costs.
Job Quality Reductions: These adjustments often involve reductions in the quality of the job from a worker's perspective.
Mitigation of Worker Well-being: It's critical to understand that these adjustments tend to mitigate, or even reverse, the positive effects of minimum wage increases on workers' well-being.
Seamless Adjustment of Job Quality: Job quality tends to adjust more readily than the quantity of jobs.
Implication: The absence of adverse effects on employment alone is not a definitive argument for the attractiveness of a minimum wage hike.
Manifestations of Job Quality Adjustments
Adjustments to Fringe Benefits
Minimum Wage Definition: In the U.S., the minimum wage sets a floor on the hourly wage rate an employer can pay.
Binding Wage Floor: Occurs when the legislated wage floor is higher than what a worker would otherwise be paid.
Compensation Components: Compensation includes both cash wages/salaries and fringe benefits.
Wages and salaries constitute the majority of labor costs.
Bureau of Labor Statistics data shows that fringe benefits (e.g., health insurance, paid leave, pensions) average nearly of total compensation.
Firm's Response: A firm considering a worker's impact on its bottom line (production increase vs. compensation cost) can react to a higher hourly wage floor by reducing fringe benefits.
Potential Neutralization: Benefit reductions might fully counteract the wage increase's impact on total costs, potentially leaving neither the firm nor the worker necessarily better or worse off.
Misleading Analysis: An exclusive focus on wage and employment impacts can misrepresent the true economic effect.
Empirical Evidence on Health Insurance:
Recent analyses across multiple data sources consistently identify negative effects of minimum wage increases on a worker's likelihood of having employer-provided health insurance (EPHI).
RAND Corporation economists Michael Dworsky et al.: Found a negative relationship between minimum wage increases and EPHI using Current Population Survey data.
Economists Mark Meiselbach and Jean Abraham: Found complementary results in the Medical Expenditure Panel Survey.
Economists Jonathan Meer, Lisa Kahn, and Jeffrey Clemens: Found similar results in American Community Survey data.
Quantitative Estimate (Clemens's work): Declines in EPHI led the value of compensation for retained employees to rise approximately less than it otherwise would have, due to minimum wage increases in several U.S. states between and . Earlier studies yielded mixed results.
Data Limitations on Benefits:
Fringe benefit data are less complete and available than employment data.
Health insurance is a primary tracked benefit, but usually measured as presence, not value.
Data often lacks information on deductibles, cost-sharing, and network expansiveness, which are crucial for assessing the true value of benefits and their potential for moderate declines to offset small minimum wage increases.
Miscellaneous Benefits: Even less is known about effects on benefits like employee discounts.
Example: McDonald's offered employees discounts on meal orders at participating restaurants, a practically important but sparsely documented aspect of employment that must be considered for a full evaluation.
Changing Other Aspects of Employment (Amenities and Disamenities)
Scope of Adjustments: Employer adjustments extend beyond fringe benefits to include performance requirements, schedule flexibility, training opportunities, and safety provisions.
Economic Terminology: These job features are categorized as "amenities" (desirable) and "disamenities" (undesirable).
Firm Investment in Amenities: Firms can invest in amenities (e.g., comfortable workplaces, improved mentorship), which are costly. Workers may trade these off against higher wages.
Firm Savings from Disamenities: Firms can save money by reducing investments in workplace safety, worker training, or improving workplace aesthetics (e.g., ugly decor, poor mentorship, marginal safety deteriorations).
Worker Tradeoff: Workers will demand higher wages to work in undesirable conditions. If jobs become less pleasant, less safe, or more taxing, workers are worse off.
Overall Worker Well-being: Whether a minimum wage increase improves or worsens overall worker well-being depends on how they value these work environment features relative to any wage gains.
Declines in Compliance (Underpayment):
Widespread Evidence: Increases in minimum wages lead to a measurable decline in compliance with the wage floor itself.
Strain and Clemens (U.S. States): Found that increased instances of underpayment eroded roughly of the mandated wage gains from state minimum wage increases over the past decade.
Goraus-Tańska and Lewandowski (Central/Eastern Europe): Provided complementary evidence that underpayment becomes more prevalent when wage floors are high relative to average wages.
Rani et al. (Developing Countries): Developed similar findings in an analysis of developing countries.
Implication: These results highlight an underappreciated tradeoff between price controls and respect for the rule of law.
Intensity of Work:
Employer Strategy: Employers may demand more output from workers to compensate for rising wage costs.
Methods: This can involve tighter productivity tracking, reduced break times, or more stringent work targets.
Recent Research Findings:
Hyejin Ku, and Decio Coviello, Erika Deserranno, and Nicola Persico: Found that low-productivity workers in agricultural and retail sales settings increased their work effort following minimum wage increases.
Magnitude of Effects: Both papers reported large effects, with increases in output largely offsetting the wage bill increase faced by firms.
Worker Cost: The physical and mental toll of a job constitutes a cost. An increase in these costs, similar to a decline in fringe benefits, reduces a worker's well-being, even as wages rise. Workers "pay" for a higher minimum wage by enduring more intense or less pleasant working conditions.
Scheduling Adjustments:
Sparse Research: Research on scheduling changes due to minimum wage changes is not extensive.
Strain and Clemens Hypothetical: Illustrated how shifting from worker-driven to employer-driven schedules (e.g., sending workers home during low customer periods) can help firms offset minimum wage costs.
Impact on Productivity: Such a shift can increase hourly output, restoring the balance between wages and output.
Cost to Workers: This change can make workers' schedules and incomes less dependable, thereby reducing their well-being.
Neutralizing Effect: Like fringe benefit adjustments, these scheduling changes can nullify both the benefits to workers and the costs to firms.
Real-World Example: The increasing use of "zero hour" contracts in the United Kingdom (workers are effectively on call) demonstrates how higher minimum wages can lead to these scheduling practices.
Adjustments to Whom Firms Employ and How Much They Employ Them
Hidden Changes in Employment Data: Industry-wide wage bills and employment counts can mask changes in the types of workers actually employed.
Skills Substitution: Firms may replace lower-skilled workers with higher-skilled ones.
John Horton (MIT Sloan, Amazon Mechanical Turk Experiment): Found strong evidence that higher minimum wage rates prompt firms to shift hiring away from low-productivity workers toward higher-productivity ones.
Kahn, Meer, and Clemens (Early-to-mid 2010s): Analyzed workers in low-wage occupations and skill sets requested in vacancy postings. They found that minimum wage increases predicted:
Increases in the average age and education of workers in low-wage jobs.
Increases in the likelihood that vacancy postings for these jobs require a high school diploma.
Conclusion: A high minimum wage may boost wages and employment prospects for some, but these gains often come at the expense of workers starting with the lowest skill levels.
Altering Workers' Hours:
Jardim et al. (City of Seattle Minimum Wage Increases): Found that work hours in low-wage jobs shifted away from new hires and inexperienced workers toward those with at least moderate experience.
Earnings Impact: More experienced workers gained earnings, while inexperienced workers lost earnings due to reduced hours.
Gopalan et al.: Provided additional evidence that incumbent workers tend to benefit from minimum wage increases, whereas the fresh hiring of low-skilled workers tends to slow.
The Minimum Wage Is a Price Floor
General Principle of Price Controls: Price controls (like the minimum wage) often distort markets and tend to influence the quality of the good or service in question.
Analogies to Other Price Controls:
Rent Controls: Can lead landlords to neglect maintenance or forego renovations.
Insurance Premium Controls: May prompt health insurance plans to increase cost-sharing provisions or reduce their networks of physicians and hospitals.
Quality vs. Quantity: These changes in quality can either supplement or occur instead of changes in quantities (e.g., number of housing units, insurance plans marketed, or low-wage workers demanded).
Common Conceptual Error: Discussions of minimum wages frequently suffer from the oversight of these other aspects and tradeoffs.
Comprehensive Understanding: The tradeoffs associated with minimum wages extend far beyond just pay increases and job numbers.
Crucial Adjustments: Increased minimum wages can affect:
Benefit offerings.
Employee discounts.
Effort requirements.
Other aspects of jobs.
The types of workers who hold those jobs.
Undermining Goals: These adjustments can subtly undermine the minimum wage's intended goals in ways that are hard to detect.
Limits of Knowledge: Appreciating these adjustments is vital for understanding the true limits of what is known about the full effects of high minimum wages.