As we all know, there’s considerable controversy over minimum wage increases. On the one side are people like me insisting that basic economics works — people buy less of more expensive things. On the other side are those who insist that there’s something special about labor, that basic economics doesn’t apply. Because, you know, reasons, or whatever.
One way of sorting through this is to look at what happens when the minimum wage increases. If we see things which are consistent with demand curves sloping downwards (people limiting their purchases of more expensive things) then we’re going to conclude that maybe there is something to Econ 101. Sure, this won’t be a proof pure and perfect, but it will be an indication.
Assume, for a moment, that the basic intuition is correct. Accept also something which should be obvious — the cost of employing someone is not their wages. It’s those, plus the conditions of their work, their breaks, vacation pay, healthcare insurance, the taxes that must be paid to employ them, unemployment insurance contributions, and so on. The total cost of employing someone is the total cost of employing someone, not just their wages.
Again, assuming that Econ 101 is correct, then if we raise, by legislation, the minimum wages that must be paid we’d expect to see employers trying to reduce the other costs of employing someone. For they care about the total cost of employment, not how it is split up into social security taxes, wages, and healthcare. They’re comparing the total of all of them to the value of the output from the work being done. Raise one part of that total compensation and we’d expect to see them trying to reduce those other parts of that total compensation.
So, what is it that we do see?
….we find robust evidence that state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations, for whom coverage declines offset 9 percent of the wage gains associated with minimum wage hikes.
More on the implications of this here.
Note how limited my claim is here. I am not, from this one study, claiming that workers are made worse off by the minimum wage increases. All I am insisting is that if basic Econ 101 is correct, that employers do have a declining demand for higher cost labor, then we’d expect to see non-wage benefits being cut as the wage portion of compensation is pushed up by legislative fiat. We do see non-wage compensation fall as the minimum wage rises — the finding is consistent with our intuition that demand curves slope downwards.
And if those demand curves do slope downwards then we’re going to see job losses from a rise in the minimum wage.
This is all balance of logic stuff rather than a one-shot killer knockout blow. Still, don’t worry, it’s going to be easy enough for minimum wage boosters to reject or ignore this paper. Jeff Clemens earlier pointed out that the Obama-era minimum wage increases caused more unemployment during the recession. As such a result is entirely inconsistent with the popular opinion better to entirely ignore anything from this source rather than try to engage with reality, eh?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
