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Who-d A-Thunk It? Mandated Minimum Wage Increases Have Adverse Effects and Lead to Lower Compensation?

By Mark J. Perry

June 13, 2021

Some new research — “Evidence of The Unintended Labor Scheduling Implications of The Minimum Wages” — shows that every $1 an hour increase in government-mandated minimum wages (“political wage-setting”) leads to the following (mostly) adverse outcomes:

  • a 27.7% increase in the total number of workers scheduled to work each week
  • a 20.8% decrease in the average number of hours each employee worked per week
  • For an average store in California, these two changes above translated into four extra workers per week and five fewer hours per worker per week, resulting in a 13.6% decrease in the total wage compensation of an average minimum wage worker
  • a 23% decrease in the percentage of employees working more than 20 hours per week (making them eligible for retirement benefits)
  • a 14.9% decrease in the percentage of employees working more than 30 hours per week (making them eligible for health care benefits)
  • a 33% increase in fluctuations in the number of hours worked per week
  • a 9.5% increase in fluctuations in the number of hours worked per day
  • a 9.8% increase in fluctuations of shift start times and
  • average net losses of at least $1,590 per year per employee, equivalent to 11.6% of workers’ total compensation (assuming that workers were able to use their reduced hours to work a second job — an assumption which may not hold true for many employees).

Here’s a summary of the research from the authors in the Harvard Business Review (“Research: When a Higher Minimum Wage Leads to Lower Compensation“):

While proponents of increasing the minimum wage have grown increasingly vocal in the U.S., new research suggests that raising the minimum wage can actually have a significant negative impact on the total compensation of hourly workers. Researchers analyzed a detailed dataset of wage and scheduling data for more than 5,000 employees at a single national retailer, and compared outcomes for workers in California (which had several minimum wage increases during the study period) and Texas (which had zero increases). They found that in the stores that experienced a minimum wage hike, workers on average worked fewer hours per week, were less likely to qualify for benefits, and had less-consistent schedules. These factors corresponded to an average 11.6% decrease in total compensation for every $1 increase in the minimum wage. Based on these findings, the authors argue that policymakers should consider minimum wage hikes with caution, and should be sure to complement them with policies designed to ensure consistent schedules and adequate hours for workers — or risk harming the very people they’re aiming to support.

And here’s the conclusion from the HBR article:

When it comes to assessing the impact of minimum wage on worker welfare, economists and policymakers tend to emphasize employment rates alone. But our study shows that other factors, such as benefits and worker schedules, can make a major difference. Even if overall employment rates remain constant, increasing the minimum wage can lead firms to make strategic shifts in their labor scheduling practices that can ultimately have a substantial, negative effect on the welfare of the very workers these policies aim to protect.

MP: Related…. As I concluded in a 2016 CD post:

To the extent that increases in the monetary minimum wage are offset by employers reducing the non-wage fringe benefits offered to their employees to remain profitable, even unskilled workers who remain employed will not necessarily be better off from a minimum wage hike. Those workers’ total compensation could stay the same, or maybe even be reduced if the reductions in non-wage attributes more than offset the artificial increase in monetary wages. In the same way that a tenant who is able to find a rent-controlled apartment in Manhattan will pay a below-market rent, but will also have to live in a necessarily reduced-quality housing unit, the unskilled worker who manages to keep or find a job following an above-market minimum wage hike will likely work in a reduced-quality work environment with significantly reduced non-wage attributes and non-wage fringe benefits.

Further, if employers offset higher minimum wages with reductions in non-monetary forms of compensation, researchers finding that a higher minimum wage doesn’t have negative employment effects might be misled into concluding that a higher minimum wage has no negative effects on minimum wage workers. By labeling the vertical axis (in a Supply and Demand diagram) as “Hourly Compensation” (instead of “Hourly Wage”) we would account more realistically for the fact that employers of low-skilled workers have many non-wage margins (fringe benefits, work hours and job attributes) that can be adjusted to help control labor costs following a minimum wage hike. And those adjustments to hourly compensation would be to the detriment of low-skilled workers, and should be included when we consider the negative effects of minimum wage increases.