Carpe Diem

Even if minimum wage hikes don’t reduce employment, they still make many unskilled workers worse off

As a thought experiment, let’s assume that there is no significant negative relationship between: a) increases in the minimum wage, and b) the number of entry-level jobs for unskilled workers (especially teenagers) working at the minimum wage.  Further, let’s assume that increases in the minimum wage have no significant adverse effect on the teenage unemployment rate.

Even if we accept those questionable and unrealistic assumptions above, 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 are employed after a hike in the minimum wage and there is NO change in the teenage jobless rate (questionable assumptions), 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:

1. Fewer hours – Unskilled workers might still be employed following an increase in the minimum wage, but at a reduced number of hours.  Full-time workers now become part-time workers, e.g. restaurant workers are  now forced to work a split-shift (e.g. 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 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 $9.00 per hour, the employer reduces the worker’s hours to 30 per week, and he or she earns $270 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, 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, 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 pretty 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.

Bottom Line: You can make it illegal for an employer to pay an unskilled worker less than $7.25 or $9.00 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.

34 thoughts on “Even if minimum wage hikes don’t reduce employment, they still make many unskilled workers worse off

  1. As I have already said before – any company that can afford to work on a labor model of fewer hours … ALREADY HAS.

    Corporate profits are at an all time high. I can assure you as a person who has worked in retail and the restaurant industry hiring, training and terminating low wage workers – any increase in the minimum wage will have very few changes to a corporation’s business model.

    Because we’ve already maximized efficiencies. It’s simple. The recession of 2009 forced this fiscal discipline on corporations and they just stuck with it.

    P.S. I can’t speak definitively to benefits for Canadian workers but obviously the laws are very different and workers have universal healthcare in Canada. Very soon McDonalds will have to provide basic coverage for all workers that up till now it has not provided.

    The CFO of McDonalds said the costs for healthcare would be not significant as they see large swings in food costs that they prepare for and increasing healthcare costs would be inconsequential.

    • Icarus Verum: “I can assure you as a person who has worked in retail and the restaurant industry hiring, training and terminating low wage workers – any increase in the minimum wage will have very few changes to a corporation’s business model. ”

      Why should anyone accept your “assurance” as fact?

      I can assure you, as a person who has managed restaurants and owned retail businesses, that increases in the minimum wage will impact the way small businesses operate.

      But why should anyone reading this accept my argument?

      I also know, because I have analyzed many business propositions for the large corporations which have employed me, that corporations do not just sit back and absorb government-mandated cost increases. If any large corporations are paying wages below $9.00 per hour, the increase in wage rates will certainly affect some decisions. The effects may not be felt immediately: automation decisions and offshoring decisions cannot be immediately implemented. But changes will be made.

      • John Dewey – companies that hire workers at minimum wage have already cut their costs to the extent that was already possible. They are all about maximizing efficiency and they have wrung out as much juice out of that turnip as possible.

        Study after study has shown that. And while you are correct to say that you shouldn’t necessarily accept my assurance as fact – I have actually hired, trained and managed low wage workers for the greater part of my life. I have had to manage businesses as minimum wage went up over the years.

        I agree that some changes will be made, but those changes would have already been made regardless of what the minimum wage actually is. But what we will see is an increase in disposable income and that will hvae a positive impact on the economy. It will not in fact create a higher unemployment rate.

        You have ‘analyzed’ these things from an office. I’ve actually had to do these peoples’ new hire paperwork. But what do I know? I’m just a communist or something probably right.

        • Icarus,

          I have a hard time believing this. Are you telling me that when a cost structure for a company changes, there is nothing they can do to increase efficiency because they already have done so? That is the story of stagnation, not of reality. Companies are constantly increasing their efficiencies, whether through capitalization, streamlining, cross-training, creating new competitive advantages, mergers, and the like.

          Think about what you are saying. If what you say is true, every time costs change for a company, they’d shut down. Save for raising prices, they’d have no recourse.

          Forgive me as I am not usually this aggressive, but this doesn’t pass the smell test. Quite frankly, it smells like shit.

        • But what we will see is an increase in disposable income and that will hvae a positive impact on the economy.

          Only if you believe the law of supply and demand don’t exist.

        • Icarus,

          Decades ago and for quite a few years I was employed in these menial labour jobs earning minimum wage and I also managed minimum wage employees (I worked all through high school and college to pay for school and living expenses – so, I actually lived on what I earned). At the time, we wrung as much efficiency as we possibly could. And yet, there’s always more efficiency to be had.

          Yes, we also went through recessions, changes in consumer preferences and other natural pressures that required us to wring out ever more efficiency or to disappear without a trace. I’m sure at the the time we thought we wrung out every bit of possible waste. Yet, here you are telling us that decades later you’ve found even more efficiencies in the food service industry. I’m sure it seems to you that you have done all that is possible and all that will ever be possible. This is not so.

          Why? Because innovations that you don’t personally see will allow you to become even more efficient. Also because as the cost of employees rises, the benefit of staying open an extra hour or fully staffing every shift is lowered and new efficiencies will preset themselves in light of these new circumstances. Every business constantly questions whether the marginal dollar of revenue is worth earning in light of the cost of earning it. The moment the marginal dollar of revenue costs more than a dollar to earn, the company simply won’t seek to earn it.

    • Icarus

      Is it your argument, then, that we have reached or passed “peak productivity*? Competitive forces will no longer result in innovation and no firm can ever gain market share against its rivals?

  2. So now you come up with new unproven theories to explain why your first theory does not work..

    Much of your theories new have the employer taking actions that reduce the productivity of the people they are paying.

    Why would anyone think that makes economic sense?

    Good luck.

    • Much of your theories new have the employer taking actions that reduce the productivity of the people they are paying.

      No. That is incorrect.

  3. Dear Dr Perry, Have you readmwhat Angus had to say about the minimum wage on kids prefer cheese recently? He thinks it is no big deal. I was a bit stunned by this. What were your thoughts on the piece he wrote?

    • Billy, you did not direct your question to me, but I too was a little surprised by that post. Among the most surprising responses was that low-skilled labour priced out of the market would simply have more incentive to acquire the necessary skills. He arbitrarily sets the bar higher and explains that you merely have to jump higher. What pathetic rationalization for robbing the poor of their few existing options?

  4. This is not a new theory as I wrote about it many years ago. Simple version: a worker’s utility is a function of wages and fringe benefits, each costing a $1 per unit. Given a fixed total compensation, the firm allocates its compensation package between wages and fringes to maximize the worker’s utility (otherwise, it will have to pay more to attract workers). Next, using standard indifference curve analysis, increase the wage but keep total compensation the same (that is, move along the budget line). The worker will be make worse off by the minimum wage hike. There is some evidence this occurs (the minimum wage increases the quit rate), but probably not to the degree of making the worker worse off. Nevertheless, the impact of, say, an increase in wages of $2 likely makes the worker, even if they retain their job, less than $2 better off due to offsets (which can include doing more chores, having fewer allowed absences, and so on).

  5. My local McDonald’s has been cutting their employee meals. About a year ago, they could get basically anything but the double quartercheese or the double filet, though not as a large meal. Now, they are limited to the “dollar” menu.

  6. I’m ambivalent about the minimum wage, but here in Washington state, where the minimum wage is $9.19/hour, our unemployment rate is slightly below the national average (7.6% vs 7.8% as of December), and if you go into stores and fast food places, you just don’t see that it makes any difference. I really wish Mark would come out here sometime and see for himself. It’s a non-issue (and Washington state has had a high minimum wage for quite a while now).

    • You commit a common error of not seeing that which is not directly under your nose.

      The general unemployment data says little about minimum wage. According to the BLS, 5.2% of workers in 2011 earned a wage at or below the national minimum wage. A change in the employment status of some of those workers (i.e. when they become unemployable as the minimum wage rises above their marginal product) is hardly going to move the overall employment statistics. And aggregate employment statistics hide important data on low-skilled workers:

      1.) People who stop looking for work because their marginal product is below the minimum wage are no longer picked up in unemployment data, allowing minimum wage proponents to feel better about themselves at the expense of the people they immiserate.

      2.) Areas with high minimum wages may include cities where market conditions dictate that virtually everyone earns a wage above the minimum wage, giving the impression that higher minimum doesn’t have any effect on employment.

      3.) While employers may not reduce the number of minimum wage workers, they will reduce compensation to those workers in other ways: eliminating important on-the-job training, subsidized child-care, inexpensive insurance and paid vacations, reducing their hours worked, and demanding more from them in the fewer hours they are allowed to work. They can convert full time workers with benefits to part-time workers with no benefits – these newly converted employees would count as “employed” even though they are clearly not better off as a result of the minimum wage increase.

      4.) Workers who lose their job as a result of minimum wage increases could move to occupations not covered by minimum wage, reducing the wage rate in those occupations, but counting as “employed” in the employment statistics, but there is little doubt that they are worse off.

      All of this is missed in aggregate employment data. You can, of course, pretend that you do no harm in immiserating the most unskilled workers, but then you have to ask what the purpose of the minimum wage is. Even if it doesn’t do much to change the employment statistic, ostensibly, increasing total employment is not the goal of the minimum wage. The minimum wage is sold to us as a method to protect the least skilled workers and lift them out of poverty. How does setting the minimum wage above their marginal product and denying them the opportunity to learn valuable on-the-job skills help them?

      Simply observing that you can walk into any existing Wendy’s and order a burger isn’t enough evidence to come to the conclusion you come to “it doesn’t make any difference.”

      • Most minimum wage jobs don’t need much training, so there is little training employers can cut down on.

        As for the other items on your list, I don’t see that those are any different from other states. And yes, I’ve lived in other states.

        You actually have to go here and, preferably, spend a good deal of time here, to witness and understand how these things are a non-issue. Washington is one of the more liberal states with a bevy of worker protection laws. According to conservative theorists this would make Washington some sort of unlivable hellhole, but that just isn’t the case. This is one of the more sane and civilized states in the nation.

        • So, basically, you’re saying you don’t understand a single word of what I wrote and you’re falling back on that most rigorous and incontrovertible evidence: “it all looks good to me!”

          (My cousin lives in Washington. But, even if that were not the case, I would still believe your claim that living standards in Washington are better than in Niger. And that observation would still be irrelevant to the minimum wage debate.)

          • You replied with a bunch of theory. I’m telling you what I’m seeing on the ground, in real life. I don’t care about theories, because most of them tend to be wrong anyway.

          • That wasn’t theory, dear. That’s what actually happens and that’s what’s documented to happen. The fact that you think it’s theory only highlights your ignorance.

            You base your opinion of the effects of minimum wage solely on the pedestrian observations that you can walk into a McDonald’s and there’s someone there to cook a hamburger for you and that you’re not living in a grass hut.

  7. I’m not really sure what benefits for a higher minimum wage would occur. Assuming no one loses their job and prices are sticky, a higher minimum wage would mean more demand for goods and services and those who just saw their pay increase would buy more (there are many big assumptions in this as I listed).

    But here’s the thing: only 0.7% of full time workers are at minimum wage. For all workers (full and part time), that number rises to 5.2%. So, let’s assume that the $9 minimum wage hike gets passed and no one who is currently employed hours get cut or they lose their job. For the full-timers, that equates to a gain of $3,700 for the year. Assuming they spend all their paycheck, you’re talking a gain of about $3.7 billion, give or take. That would make a net gain of 0.6% in retail sales. So, any benefit would be minimal at best. Given the known harms of the minimum wage (pricing out the lowest skilled of the workforce), this seems like an awful lot of harm for virtually no benefit.

    • Jon, I realize this is a thought experiment and I’ve read your caveat, but if there is more demand for goods and services, why would prices remain sticky- particularly in anything but the very short-run? Also, if prices and downwardly sticky and a firm faces higher costs, then it’s profit margin is lower. Why wouldn’t firms seek to cut costs further to optimize profits? And if firms are cutting costs like fringe benefits in the form of insurance, then those minimum wage workers lucky enough to keep their job would not really have “more money in their pocket” as they now have to buy insurance as an individual in the market, without their employer’s bargaining power.

      I’m sure you don’t disagree with the above and that’s what makes that thought experiment pure fantasy. Real people are made to suffer so that meddlers can engage in self-serving fantasies. Repugnant.

      • I made those assumptions for a “best case scenario.” You and I both know they are stupid assumptions, but they are the assumptions made when talking about this. Look at all the comments in favor: “It will increase demand!” In the very short term, yes, but in the rest of the time, no.

        • You know, I doubt that there’s a demand boost in the short run. It’s not as if these changes aren’t broadcast before they’re made. Businesses don’t wait until the laws are a fait accompli. They begin to plan their response long before the law takes effect.

  8. The most likely goal of the minimum wage is to enable families to earn enough money so that they can have enough food, water & shelter to survive.

    Assuming that the minimum wage is eliminated, how then will society deal with the fact that there are a lot of families that have to work like animals just to have enough money to survive?

    • The goal is irrelevant to the reality.

      The reality for people whose skills don’t justify a higher wage is the loss of a job. How do you expect them earn money without a job?

      If they don’t lose their job entirely, employers will cut valuable perks – items that will not have to paid for with their slightly higher earnings, making them no better off and possibly worse off – and work hours.

      How does society deal with people it robs of any opportunity to earn an honest living and move up in the world? Well, we usually stuff them into jail for selling drugs of violating some asinine code as they struggle to feed their family doing odd jobs after being laid off as a result of the minimum wage. That’s what your compassionate minimum wage does to the truly disadvantaged in this country.

  9. I think that rising minimum wages not only affects less-skilled workers, but also medium-skilled workers. If a employer is in the obligation to rise the wage of their less skilled workers and think it unfaithful to fire them (because they have families or so on), then, probably will not increase for a longer time the wage for other workers, more skilled but paid above minimum wage. So, at the end, the medium-skilled workers will have a wage very similar to those less skilled than them.
    Which is, certainly, unfair.

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