Effect of the Minimum Wage on Hours Worked
September 16, 2014
While economic theory predicts negative consequences from minimum wage hikes, a number of studies have produced empirical evidence showing no job losses from increasing the minimum wage. Why the disconnect? Mark Perry, professor at the University of Michigan and scholar at the American Enterprise Institute, explains that minimum wage hikes ultimately affect the number of hours worked, not the number of workers employed by a firm.
Raising the minimum wage from $7.25 per hour to $10.10 per hour would increase employers' labor costs by 39 percent. To deal with the increased costs, employers will try to reduce the number of hours worked by doing one of the following:
- Reducing workers' hours (perhaps moving an employee from 40 hours of work per week to 30 hours per week).
- Firing workers.
- Cutting back on plans to expand hiring.
- Choosing to employ skilled workers over unskilled workers, as the price of unskilled workers has risen.
- Turning to automation to replace worker functions with those that can be done via machine.
According to Perry, it is entirely possible for an employer to maintain labor costs after a 39 percent wage hike by reducing the number of hours worked and cutting back on non-monetary compensation (fringe benefits). Similarly, if an employer halts his plans to expand his business, jobs that would have been created have been lost, yet those losses are not accounted for in minimum wage analyses.
Source: Mark J. Perry, "The Law of Demand and the minimum wage: It applies to number of hours worked, not the level of employment," American Enterprise Institute, September 14, 2014.
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