Minimum Wage Debate: Why Both Sides Are Off Course

September 16, 1999

Economists at the Federal Reserve Bank of Dallas suggest the minimum wage debate may be off course. They say few workers lose jobs -- and few benefit from mandated wage hikes -- because employers can and will adjust either nonwage compensation or work requirements to keep compensation at the market rate.

  • In the next debate, much will likely be made of how the current federal minimum wage of $5.15 an hour has no more purchasing power than the minimum wage of the early 1950s.
  • The minimum wage in current dollars has risen in a series of 19 steps from 25 cents in an hour in October 1938, when the first federal minimum wage took effect, to $5.15 currently.
  • However adjusting the value for inflation shows the minimum wage rose irregularly from $2.92 in October 1938 to $7.78 in 1968, then fell irregularly to its current level of $5.15, a third less than the 1968 peak.

However, when Congress forces employers to pay more in money wages than the market dictates, it causes them to pay less in other forms, most notably fringe benefits. And if there are few fringes to take away, employers can always increase work requirements.

  • Masanori Hashimoto finds that under the 1967 minimum wage hike, workers gained 32 cents per hour in money income but lost 41 cents per hour in training.
  • Research conducted by L.F. Dunn, Belton Fleisher, and William Alpert shows that minimum wage increases lead to large reductions in fringe benefits and to more stringent work requirements.

Thus, when the minimum wage is raised, the value to the workers of the fringe benefits and the less onerous work requirements they are forced to give up will be greater than the value of the additional income.

Source: Richard B. McKenzie "The Minimum Wage Debate: Always Off Course, Southwest Economy, July/August 1999, Federal Reserve Bank of Dallas.

 

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