Minimum Wage Hike Often Offset By Fringe Benefit Cuts
By RICHARD B. MCKENZIE
Posted 06:47 PM ET
Both proponents and opponents of federal minimum-wage hikes are convinced that if Congress raises the minimum wage (whether to $9 or $10.10 or $15 an hour) the welfare of tens of millions of low-income workers will rise by a comparable amount.
The two sides disagree over the extent of the job losses low-wage workers will suffer, but both sides acknowledge that a substantial majority of econometric studies undertaken over the past half-century show that a 10% hike in the federal minimum wage results in job losses for unskilled workers of no more than 3%, and potentially less than 1%.
Most recently, the Congressional Budget Office found that if the minimum wage is hiked to $10.10 an hour, expected job losses by 2016 will amount to a scant 0.3% of the jobs affected.
Those in favor of a minimum wage increase are willing to accept these employment losses for the few in exchange for income gains for the many.
But this view fails to recognize that 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.
If workers value a fringe benefit at $1 an hour that costs their employers 80 cents an hour, employers would gladly offer the fringe by cutting workers' money wage by 90 cents, making workers and themselves better off by a dime per hour.
Workers get the $1 worth of benefits per hour and lose only 90 cents in wages per hour.
Employers see an hourly wage reduction of $1 and incur only 90 cents in the cost of the fringe.
Wage floors restrain competitive pressure, but in only one of the many ways in which businesses compete.
With a minimum-wage increase, employers will move to cut labor costs by reducing fringe benefits and increasing work demands, which are likely to be more highly valued by workers than the money increase.
In the example above, a forced 90 cent increase in the hourly wage can cause employers to take away the $1 in benefits, which explains why minimum-wage increases have so little effect on job losses: Employers' labor costs go up by only a dime.
At the same time, employed workers' total compensation goes down by a dime.
Indeed, several econometric studies have borne out these conclusions.
One researcher found that the 90 cent per hour increase in the federal minimum-wage rate in the early 1990s reduced the probability of workers receiving employer-provided health insurance from 66.2% to 63.1%, and increased the likelihood that covered workers would be reduced to part-time work by 26%.
Another researcher determined that a wage increase caused New York retailers to increase work demands: Fewer workers were given fewer hours to do the same work as before.
He also found that for every 10% increase in the minimum wage, workers lose 2% of nonmonetary compensation per hour.
If employers can't offset the cost effects of the wage hikes, employers can easily turn to substitutes for unskilled workers in droves. They can shift to noncovered workers (such as unpaid interns), automated machines and often to cheap imports.
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.
• McKenzie is a senior fellow with the National Center for Policy Analysis and the Gerken professor emeritus in economics and management at the Merage School of Business at the University of California, Irvine.