NCPA - National Center for Policy Analysis


July 28, 2006

Besides causing more unemployment, a federal minimum-wage hike would also increase the number of Americans without health insurance, say John C. Goodman, president of the National Center for Policy Analysis, and Richard B. McKenzie, a professor in the Paul Merage School of Business at the University of California, Irvine.  

Employers and employees will seek ways around the law, by reducing nonwage compensation:

  • About one in every three employees near the minimum wage has access to such benefits as vacation time, health insurance, holiday pay, employee discounts, uniforms and credit toward college tuition. 
  • Overall, fringe benefits account for up to 30 percent of total employee compensation.
  • Fringe benefits are not subject to payroll and income taxes; thus, after taxes, $1 of fringe benefits can equal a $1.25 or more of wages.

Employers can also reduce labor costs by spending less on working conditions or employee training.  Employers may also impose more rigorous work requirements, insisting that employees work faster or work harder, say Goodman and McKenzie.

The net effect of these adjustments is to largely neutralize the cost impact of the minimum wage hike.  For example, when the minimum wage increases by $1, the cost of labor may, on balance, rise by only 5 cents.  Workers who retain their jobs are unlikely to be any better off than before.  They get more money, but they also get fewer benefits and have to work harder for their pay, explain Goodman and McKenzie.

Source: John C. Goodman and Richard B. McKenzie, "Saving Health Insurance from the Minimum Wage," National Center for Policy Analysis, Brief Analysis No. 565, July 28, 2006.

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