A high minimum wage doesn’t just cost lower skilled workers jobs

13 Dec

From Economist Mark Perry:

Even if an increase in the minimum wage to $10.10 per hour doesn’t cost jobs, it’ll still make unskilled workers worse off

minwage11Given the lively discussion on yesterday’s minimum wage post and President Obama’s comments last week on the minimum wage, I thought it would be a good time to re-post an updated version of this CD post from last February. And for any discussion on the minimum wage, I can’t resist re-posting Henry Payne’s excellent minimum wage cartoon above, as a bonus.

As a thought experiment, let’s assume that there is no significant negative relationship between: a) an increase in the minimum wage to $10.10 per hour as proposed, and b) the number of entry-level jobs for unskilled workers (especially teenagers) working at the minimum wage. Further, let’s assume that an increase in the minimum wage to $10.10 per hour has no significant adverse effect on the teenage unemployment rate. In other words, let’s buy into President Obama’s recent claim that “There’s no solid evidence that a higher minimum wage costs jobs” (which got a “Two Pinocchio rating” by the Washington Post, indicating “Significant omissions and/or exaggerations.”)

Even if we accept those questionable and unrealistic assumptions above that contradict economic theory and most of the empirical evidence on the minimum wage, we cannot therefore conclude that increases in the minimum wage have no negative effects on unskilled workers.” Here’s why:

Even if we assume that the same number of unskilled teenage workers will be employed after a hike in the minimum wage to $10.10 per hour, and assume that there is NO change in the teenage jobless rate, there are many OTHER adjustments that employers would make to offset the monetary increase in labor costs, which would make many unskilled workers worse off following an increase in the minimum wage to $10.10 per hour:

1. Fewer hours – Unskilled and low-skilled workers might still be employed following an increase in the minimum wage to $10.10 per hour, but at a reduced number of hours. Full-time workers now might become part-time workers, e.g. restaurant workers are  now forced to work a split-shift (11 a.m. – 2 p.m. and 5 p.m. – 8 p.m.). Therefore, we would expect a negative relationship between: a) increases in the minimum wage to $10.10 per hour and b) the number of hours worked, which wouldn’t be reflected in teenage employment levels (the BLS counts workers as “employed” whether they work 1 hour or 50 hours per week) or the teenage jobless rates.

As an example, suppose an unskilled, entry-level teenage worker is earning the current hourly minimum wage of $7.25, works 40 hours per week and earns $290 per week. After the proposed increase to $10.10 per hour, the employer reduces the worker’s hours to 26 per week, and he or she earns $262.60 per week, less than before the minimum wage increased.

2. Reduced benefits – Following minimum wage hikes, employers can adjust “total employee compensation” and offset higher monetary wages by reducing fringe benefits such as: a) no longer providing free or discounted uniforms and shifting the cost of uniforms to employees, b) no longer providing free food or food discounts for restaurant employees, c) reducing or eliminating “employee discounts” on the employer’s merchandise, d) eliminating paid holidays, e) eliminating scholarship programs or tuition reimbursement, f) eliminating group discounts available through large companies like McDonald’s, g) eliminating employer sponsored or subsidized health care benefits, h) reducing or eliminating company holiday parties and picnics, i) eliminating or reducing any profit sharing or bonus programs, etc.

As an example, see the list of benefits here for McDonald’s workers in Canada (I couldn’t find a comparable list for the U.S., but I assume it would be similar), and you’ll see that there are many non-monetary fringe benefits offered to even unskilled, entry-level workers (scholarships, free uniforms, food discounts, profit-sharing, stock purchase plan, insurance, etc.), and those benefits could be reduced following mandated minimum wage increases.

MP: You can make it illegal for an employer to pay an unskilled worker less than $7.25 or $10.10 per hour, but you can’t legally force private employers to hire entry-level workers at those artificially-high, government-mandated wages, and you can’t prevent employers from reacting to higher minimum wages in ways that hurt unskilled workers like: a) cutting existing workers’ hours or laying them off, b) reducing non-monetary forms of compensation, and c) investing in labor-saving equipment that substitute automation for unskilled workers. Demand curves slope downward, and the market for unskilled workers is no exception. Employers will respond to increases in the minimum wage in many ways that may not show up as an increase in the teenage unemployment rate or a reduction in the number of unskilled workers employed, but those responses will make unskilled entry-level workers significantly worse off.

Bottom line: Much of the discussion and debate on the minimum wage focuses almost exclusively on whether or not (and how much) government-mandated wage increases for unskilled and low-skilled workers affect employment levels. The economic reality is that there are many potentially negative effects on low and unskilled labor following hikes in the minimum wage by government fiat that won’t be reflected in employment levels, and those economic realities seem to be largely ignored by proponents of government price controls.

One more point: We have all heard the phrase “minimum wage law” so many times, and I’m sure to most Americans the phrase has a positive and compassionate connotation (who could object to helping unskilled workers with no experience make a little more money?). But I think there is a danger here because the ubiquity of the phrase has numbed us to the reality that the compassionate-sounding “minimum wage law” is in reality a government-mandated price control, which prevents private citizens from engaging in mutually beneficial exchanges, with the threat of fines or jail time. Let’s not forget that the pleasant sounding “minimum wage law” gives politicians and government bureaucrats control over the lives of ordinary citizens, and we’re all a little bit less free because of price controls declared by government fiat. If you’re willing to allow and accept government control over the wages for unskilled workers, what other powers are you willing to grant the government, and what other freedoms are you willing to sacrifice?

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