NCPA - National Center for Policy Analysis

Complex Effects of the Minimum Wage

May 28, 1996

Hiking the federally mandated minimum wage probably won't cause hundreds of thousands of workers to lose their jobs -- but neither will it improve workers' long-term welfare, according to a new brief analysis from the National Center for Policy Analysis.

The more likely effects of a minimum wage hike, predicts economist Richard McKenzie of the University of California - Irvine, are:

  • Few low-paid workers will lose their jobs, but those who keep them -- and other workers -- will likely be worse off.
  • Employers will reduce non-money types of pay -- primarily health insurance or other fringe benefits -- to keep their labor costs from rising.
  • Although few jobs may be lost, far more jobs will never be created.

Thus, increasing the minimum wage may increase the number of workers without health insurance. Since employers may spread the impact of increased labor costs across the entire workforce, benefits may be reduced for all workers.

Employers have paid lower real minimum wages over the years, but expanded other forms of payment, including fringe benefits, workplace amenities and relaxed work demands.

These benefits were worth more to the workers than the wages they gave up in exchange. When they are taken away after the minimum-wage hike, workers will lose more in value from the benefits forgone than they will receive from the higher money wage.

Low-income jobs are mostly held by inexperienced workers who are not very productive. If new low-wage jobs are not created, these workers are not likely to be hired for higher-wage jobs, and economic growth will be lower.

North Carolina State University economist Walter Wessels, a minimum wage scholar, estimates that minimum-wage workers are indeed made worse off, on balance, each time the minimum wage is hiked.

Source: "Complex Dynamics of the Minimum Wage," Richard McKenzie, Brief Analysis 204, May 28, 1996, National Center for Policy Analysis.

 

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