I’ve argued before on CD that saying (or finding empirically) that minimum wage increases have no or very small effects on employment levels is not the same as saying that minimum wage increases have no negative effects on low-skilled and unskilled workers. Reason? Even if employers maintain the same staffing levels of low-skilled and unskilled workers following a large increase in the minimum wage (e.g. 40% from $7.25 to $10.10 per hour) as before, many businesses will make adjustments to a variety of non-monetary factors to compensate for the higher, government-mandated monetary wage. Those adjustments might include reducing hours, fringe benefits and on-the-job training, and increasing expectations of work productivity (fewer workers or fewer hours to the same or more work). On net, those non-monetary adjustments could mean that many workers who keep their jobs (or find a job) won’t necessarily be any better off following a minimum wage hike, and could even be worse off.
The unavoidable and inevitable adjustments to non-monetary factors following minimum wage increases is the main topic of an op-ed in today’s Investor’s Business Daily by economist Richard McKenzie titled “Minimum Wage Hike Often Offset By Fringe Benefit Cuts.” Here are Richard’s key points:
…. wage income is not the only form of compensation with which employers pay their workers. Also in the mix are fringe benefits, relaxed work demands, workplace ambiance, respect, schedule flexibility, job security and hours of work. Employers compete with one another to reduce their labor costs for unskilled workers, while unskilled workers compete for the available unskilled jobs — with an eye on the total value of the compensation package. With a minimum-wage increase, employers will move to cut labor costs by reducing fringe benefits and increasing work demands…
Proponents and opponents of minimum-wage hikes do not seem to realize that the tiny 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 and hard-to-measure cuts in nonmoney compensation.
MP: The government can pass a law making it illegal for an employer to pay an unskilled worker less than $7.25 or $10.10 per hour in monetary wages, but the government can’t prevent employers from reacting to higher minimum wages in ways that help businesses and hurt unskilled workers including: a) cutting workers’ hours or laying them off (or refusing to hire them in the first place), b) reducing or eliminating non-monetary forms of employee compensation, and c) investing in labor-saving technologies that substitute automation for unskilled workers. Many of those employer responses will be hard to quantify (or even detect) and will not show up in official employment levels or jobless rates for entry-level workers. But those responses will make low-skilled workers worse off, and could either completely neutralize the higher money wage, or could even be large enough to make workers worse off overall.
One more point from my previous post: Let’s not forget that the compassionate-sounding minimum wage law is in reality a coercive government-mandated price control, which prevents private citizens from engaging in mutually beneficial exchanges, with the threat of fines or jail time. The
minimum wage law coercive government-mandated price control gives politicians and government bureaucrats control over the lives of ordinary citizens, and we’re all a little bit less free when price controls are imposed on the citizenry by government fiat and voluntary transactions are outlawed. 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?