Harvard Business Review: Minimum Wage Hikes Led to Lower Worker Compensation, New Research Shows

New research published in the Harvard Business Review reveals (once again) that minimum wage laws achieve unintended results. 

By Jon Miltimore of FEE.

"Opponents of minimum wage laws tend to focus their criticism on one particular adverse consequence: by artificially raising the price of labor, they reduce employment, particularly for the most vulnerable in society.

“Minimum wage laws tragically generate unemployment, especially so among the poorest and least skilled or educated workers,” economist Murray Rothbard wrote in 1978. “Because a minimum wage, of course, does not guarantee any worker's employment; it only prohibits, by force of law, anyone from being hired at the wage which would pay his employer to hire him.

Though some economists, such as Paul Krugman, reject Rothbard’s claim, a recent study found the overwhelming body of academic research supports the idea that minimum wage laws increase unemployment.

New research, however, shows this is not the only adverse outcome of wage floors.

‘When a Higher Minimum Wage Leads to Lower Compensation’

On Thursday the Harvard Business Review published an article under the headline, “Research: When a Higher Minimum Wage Leads to Lower Compensation.”

The article explores research conducted by Qiuping Yu (Georgia Tech), Shawn Mankad (Cornell University), and Masha Shunko (University of Washington), which leveraged a highly granular set of scheduling data to measure how changes in the minimum wage affected workers’ schedules.

“Specifically, we looked at worker schedule and wage data from 2015 to 2018 for more than 5,000 employees at 45 stores in California — where the minimum wage was $9 in 2015, and has increased every year since then — and at 17 stores in Texas, where the minimum wage was $7.25 for the duration of our study,” the researchers said.

The analysis found minimum wage increases had no statistically significant effect on total labor hours at a given store. However, the researchers did find changes in how those hours were allocated to workers.

“For every $1 increase in the minimum wage, we found that the total number of workers scheduled to work each week increased by 27.7%, while the average number of hours each worker worked per week decreased [sic] by 20.8%,” the researchers wrote. “For an average store in California, these changes translated into four extra workers per week and five fewer hours per worker per week — which meant that the total wage compensation of an average minimum wage worker in a California store actually fell by 13.6%.”

This didn’t just result in less overall income for many workers, the authors noted. It also impacted their ability to receive non-wage benefits.

“We found that for every $1 increase in minimum wage, the percentage of workers working more than 20 hours per week (making them eligible for retirement benefits) decreased by 23.0%,” the researchers said.

Strategically Reducing Other Forms of Compensation

These findings should come as no surprise. In a 2019 FEE article, economist John Phelan explained four ways employers typically respond to minimum wage hikes. One way was to cut the hours of workers, Phelan noted; another was to cut other forms of remuneration, including benefits like health insurance.

“Simply put, as the minimum wage rises, other elements of worker compensation fall,” Phelan wrote.

This is precisely what the new research highlighted by Harvard Business Review found.

“[Our research] suggests that as minimum wage increases, firms may strategically adjust their scheduling practices to reduce the number of workers eligible for benefits,” write Yu, Mankad, and Shunko. “Our estimates suggest that the average store in our California data set recouped approximately 27.5% of the increase in its wage costs through savings associated with reducing benefits.”

Again, this is not complicated stuff and should come as no surprise. If businesses are forced to increase compensation in one area, they’ll seek to reduce it in others to protect their bottom line.

The research also helps explain why some economists (a minority) are less certain that increases in the minimum wage will “substantially” reduce employment and provides an explanation for the few studies that don’t show unemployment increasing after minimum wage hikes. Evidence shows employers are finding more creative and productive ways to adjust to minimum wage hikes than simply laying off workers.

The Reality of Tradeoffs

Proponents of increasing the minimum wage have a tendency to believe it is a win-win policy. But economics teaches us that life is always about tradeoffs.

And once again, evidence shows minimum wage hikes come with adverse consequences, which tend to fall on the most vulnerable workers—those with the fewest skills and lowest productivity.

Proponents of minimum wage laws today are making the same mistakes that proponents were making in 1966, when Milton Friedman correctly predicted that a 28 percent national minimum wage increase would negatively impact employment, particularly for teens and minorities.

“Many well-meaning people favor legal minimum-wage rates in the mistaken belief that they help the poor,” Friedman wrote. “These people confuse wage rates with wage income.”

This was true when Friedman wrote it in 1966. And it’s just as true today."