NCPA - National Center for Policy Analysis

Health Insurance And The Minimum Wage

October 26, 1999

Support is growing in Congress for increasing the federal minimum wage by $1, from $5.15 to $6.15, in two steps over the next year and a half. Economists have traditionally warned that a higher minimum wage increases unemployment. But recent studies point to an even more serious consequence: fewer fringe benefits, including health insurance.

To neutralize the impact of the wage hike, employers and employees will seek to reduce nonwage compensation by $1 for such fringe benefits as vacation time, health insurance, holiday pay, etc. They may also spend less on working conditions and employee training costs.

  • Ohio State University labor economist Masanori Hashimoto found that employees gained 32 cents per hour in money income but lost 41 cents per hour in on-the-job training due to the 1967 minimum wage hike.
  • A 1981 American Enterprise Institute study concluded that minimum wage increases reduce on-the-job training and, as a result, dampen growth of workers' real long-run income.
  • And a recent Federal Reserve study concluded that -- for low-paid employees with health insurance -- a $1 per hour increase in the minimum wage could result in a $1 per hour decrease in employer-provided health insurance.

Those earning lower wages are already more likely to lack health insurance. And although many minimum wage workers are teen-agers and part-timers, almost one million are single mothers.

However, if the minimum wage is increased, the bill should let employers count the amount of the increase against spending on employees' health insurance, and give employees the option of taking the increase in cash or in health insurance. Employers who do not provide health insurance could set up a flexible spending account for employees -- which would let employees purchase their own nontaxed health insurance.

This way, the number of uninsured might actually be decreased, rather than increased.

Source: Richard McKenzie and John C. Goodman, "Health Insurance and the Minimum Wage," Brief Analysis No. 306, October 26, 1999, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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