Why Are There So Few Job Losses from Minimum-Wage Hikes?

April 9, 2014

Proponents of minimum wage hikes routinely cite the relatively few job losses projected to occur as a result. According to the Congressional Budget Office's analysis of recent proposals for a minimum wage increase to $10.10 an hour, for example, the agency projects that only 0.3 percent of jobs affected by the increase would be lost by 2016. But these minor employment losses do not tell the whole story, says Richard McKenzie, a senior fellow with the National Center for Policy Analysis.

When employers are faced with higher labor costs, they will find ways to reduce them, and in the case of a higher minimum wage, employers will cut back on fringe benefits and increase their employees' work demands. While the workers who retain their jobs after the increase will see higher (taxable) money wages, they will receive those higher wages in exchange for lower (untaxable) fringe benefits.

McKenzie describes how this has worked in the past:

  • When the minimum wage was increased in 1967, one economist found that workers gained 32 cents in money income but lost 41 cents per hour in training.
  • Two separate studies concluded that increases in the minimum wage reduce on-the-job training, hurting long-run growth in the real incomes of covered workers.
  • North Carolina State University economist Walter Wessels determined that a wage increase caused New York retailers to increase work demands. In most stores, fewer workers were given fewer hours to do the same work as before.
  • And for every 10 percent increase in the minimum wage, Wessels found that workers lose 2 percent of nonmonetary compensation per hour.

Using Wessels' estimates, McKenzie says that an increase in the federal minimum wage from $7.25 an hour to only $9.00 an hour would actually make covered workers worse off by 35 cents an hour. And raising the wage to $10.10 per hour? The estimated 16.5 million employees who would be affected could lose nonmonetary compensation more valuable than the $31 billion in additional wages they are expected to receive.

Source: Richard B. McKenzie, "Why Are There So Few Job Losses from Minimum-Wage Hikes?" National Center for Policy Analysis, April 2014.

 

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