{"id":8145,"date":"2019-09-25T08:13:22","date_gmt":"2019-09-25T15:13:22","guid":{"rendered":"http:\/\/www.rationalargumentator.com\/index\/?p=8145"},"modified":"2019-09-25T08:13:22","modified_gmt":"2019-09-25T15:13:22","slug":"responses-to-minimum-wage-laws","status":"publish","type":"post","link":"https:\/\/www.rationalargumentator.com\/index\/blog\/2019\/09\/responses-to-minimum-wage-laws\/","title":{"rendered":"4 Ways Employers Respond to Minimum Wage Laws (Besides Laying Off Workers) \u2013 Article by John Phelan"},"content":{"rendered":"<p style=\"text-align: center;\"><a href=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2015\/06\/tophatwhitesm.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-4311\" src=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2015\/06\/tophatwhitesm.jpg\" alt=\"\" width=\"150\" height=\"150\" srcset=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2015\/06\/tophatwhitesm.jpg 150w, https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2015\/06\/tophatwhitesm-100x100.jpg 100w\" sizes=\"auto, (max-width: 150px) 100vw, 150px\" \/><\/a><\/p>\n<p style=\"text-align: center;\"><span style=\"color: #0000ff;\"><strong>John Phelan<\/strong><br \/>\nSeptember 25, 2019<br \/>\n<span style=\"color: #000000;\">*************************<\/span><\/span><\/p>\n<p>Most of you will be familiar with a supply and demand graph. This shows a demand curve, which graphs the relationship between the price of something and the quantity demanded of that something, as well as a supply curve, which graphs the relationship between the price of something and the quantity supplied of that something. It is probably the most basic\u2014and useful\u2014model in economics.<a href=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium.png\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-8158\" src=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium.png\" alt=\"\" width=\"2160\" height=\"2160\" srcset=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium.png 2160w, https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium-150x150.png 150w, https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium-300x300.png 300w, https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium-768x768.png 768w, https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium-1024x1024.png 1024w, https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium-270x270.png 270w, https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/employment-equilibrium-100x100.png 100w\" sizes=\"auto, (max-width: 2160px) 100vw, 2160px\" \/><\/a>Whether the something in question is a good or a service, shoes or labor, the basic supply and demand model predicts that, <em>ceteris paribus<\/em>, an increase\/fall in the price of something will lead to a fall\/increase in the quantity demanded of that something\u2014this is <a href=\"https:\/\/www.americanexperiment.org\/2017\/07\/liberal-economist-minimum-wages\/\" rel=\"nofollow\">Econ 101<\/a>.<\/p>\n<p>In the context of minimum wage laws, this model predicts that setting a minimum wage above the equilibrium level or raising it will lead to a lower quantity of labor demanded. Often, people think this means fewer workers employed. So, when minimum wage hikes aren\u2019t followed by increases in unemployment, people cite this as evidence that minimum wage hikes don\u2019t reduce employment.<\/p>\n<p>But a model is an abstraction from reality. In that messy reality, there are a number of things employers can do in response to a minimum wage hike that don\u2019t involve laying off employees.<\/p>\n<h2 id=\"link-0\">Cut Hours Rather Than Workers<\/h2>\n<p>Remember, the simple supply and demand model says that increasing the price of labor leads to a lower quantity of labor demanded. But an employer doesn\u2019t need to cut workers to achieve that. They can cut their hours instead.<\/p>\n<p>Research from Seattle illustrates this. In 2014, the city council there passed an ordinance that raised the minimum wage in stages from $9.47 to $15.45 for large employers in 2018 and $16 in 2019. In 2017, <a href=\"https:\/\/www.nber.org\/papers\/w23532.pdf\" rel=\"nofollow\">research<\/a>\u00a0from the University of Washington examining the effects of the increases from $9.47 to as much as $11 in 2015 and to as much as $13 in 2016, found:<\/p>\n<blockquote><p>\u2026the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees\u2019 earnings by an average of $125 per month in 2016. [This was later revised to $74]<\/p><\/blockquote>\n<p>As the model predicts, the price of labor increased, and the quantity of labor demanded fell.<\/p>\n<p><a href=\"https:\/\/www.nber.org\/papers\/w25182.pdf\" rel=\"nofollow\">A follow-up paper<\/a> looked at the impact on workers who were employed at the time of the wage hike, splitting them into experienced and inexperienced workers. It found that, on average, experienced workers earned $84 a month more, but about a quarter of their increase in pay came from taking additional work outside Seattle to make up for lost hours. Inexperienced workers, on the other hand, got no real earnings boost\u2014they just worked fewer hours. Again, as the model predicts, the price of labor increased and the quantity of labor demanded fell. Instead of more money, they got more free time.<\/p>\n<h2 id=\"link-1\">Make Employees Work Harder<\/h2>\n<p>An employer could try to raise worker productivity to match the new minimum wage. One way to do this is simply to work their employees harder.<\/p>\n<p><a href=\"https:\/\/docs.google.com\/viewer?a=v&amp;pid=sites&amp;srcid=ZGVmYXVsdGRvbWFpbnxoeWVqa3V8Z3g6MzYzMzFjMDZkODg0MDcw\" rel=\"nofollow\">One paper<\/a> by Hyejin Ku of University College London looks at the response of effort from piece-rate workers who hand-harvest tomatoes in the field to the increase in Florida\u2019s minimum wage from $6.79 to $7.21 on January 1, 2009. It found that worker productivity (i.e., output per hour) in the bottom 40th percentile of the worker fixed effects distribution increases by about 3 percent relative to that in the higher percentiles. The author concludes:<\/p>\n<blockquote><p>These findings suggest that while an exogenously higher minimum wage implies a higher labor cost for the firm, the rising cost can be partly offset by the increased effort and productivity of below minimum wage workers.<\/p><\/blockquote>\n<p><a href=\"http:\/\/tintin.hec.ca\/pages\/decio.coviello\/research_files\/Draft_MinW.pdf\" rel=\"nofollow\">Another recent study<\/a> by economists Decio Coviello, Erika Deserranno, and Nicola Persico looks at the impact of a minimum wage hike on output per hour among salespeople from a large US retailer. \u201cWe find that a $1 increase in the minimum wage (1.5 standard deviations) causes individual productivity (sales per hour) to increase by 4.5%,\u201d they note.<\/p>\n<p>Importantly, tomato harvesting and sales are labor-intensive work. Any increase in output per hour can be assumed to come from increased physical effort.<\/p>\n<h2 id=\"link-2\">Cut Other Elements of Remuneration<\/h2>\n<p>Supporters of higher minimum wages talk almost exclusively about wages. But this is only one part of a worker\u2019s total remuneration. The cost of an employee to the employer is not just the wage but total remuneration, including benefits such as health insurance. If legislation increases the wage, the employer can keep overall remuneration the same by reducing other elements.<\/p>\n<p><a href=\"https:\/\/www.nber.org\/papers\/w24635.pdf\" rel=\"nofollow\">A\u00a0new paper<\/a> from economists\u00a0Jeffrey Clemens,\u00a0Lisa B. Kahn, and\u00a0Jonathan Meer finds that this is what happens in practice. The authors \u201cexplore the theoretical and empirical relationship between the minimum\u00a0wage and fringe benefits, with a focus on employer-sponsored health insurance.\u201d They find:<\/p>\n<blockquote><p>[There is] robust evidence that state-level minimum wage\u00a0changes decreased the likelihood that individuals report having employer-sponsored health\u00a0insurance. Effects are largest among workers in very low-paying occupations, for whom coverage\u00a0declines offset 9 percent of the wage gains associated with minimum wage hikes. We find\u00a0evidence that both insurance coverage and wage effects exhibit spillovers into occupations\u00a0moderately higher up the wage distribution. For these groups, reductions in coverage offset a\u00a0more substantial share of the wage gains we estimate.<\/p><\/blockquote>\n<p>Simply put, as the minimum wage rises, other elements of worker compensation fall.<\/p>\n<h2 id=\"link-3\">Hire Fewer People, More Robots<\/h2>\n<p>If a business that plans to add 10 jobs over a year cancels these plans on the passage of a minimum wage hike, those 10 jobs have been destroyed without ever showing up in the data.<\/p>\n<p><a href=\"https:\/\/www.aeaweb.org\/conference\/2019\/preliminary\/paper\/h6G2hhAK\" rel=\"nofollow\">Economists from Washington University in St. Louis<\/a> use wage data on one million hourly wage employees from over 300 firms spread across 23 two-digit NAICS industries to estimate the effect of six state minimum wage changes on employment. They find \u201c\u2026that firms are more likely to reduce hiring rather than increase turnover, reduce hours, or close locations in order to rebalance their workforce.\u201d<\/p>\n<p>As we look at responses over time, we also see the possibility that employers can substitute capital inputs for labor inputs.<\/p>\n<p>Economists <a href=\"https:\/\/www.nber.org\/papers\/w23667\" rel=\"nofollow\">Grace Lordan and\u00a0David Neumark<\/a>\u00a0analyze how changes to the minimum wage from 1980 to 2015 affected low-skill jobs in various sectors of the US economy, focusing particularly on &#8220;automatable jobs \u2013 jobs in which employers may find it easier to substitute machines for people,\u201d such as packing boxes or operating a sewing machine. They find that\u00a0across all industries they measured,\u00a0raising the minimum wage by $1 equates to a decline in &#8220;automatable&#8221; jobs of 0.43 percent, with manufacturing even harder hit.<\/p>\n<p>They conclude that<\/p>\n<blockquote><p>groups often ignored in the minimum wage literature are in fact quite vulnerable to employment changes and job loss because of automation following a minimum wage increase.<\/p><\/blockquote>\n<p>Minimum wage hikes are bad public policy. Economics, like all social sciences, has difficulty testing its models against data, but even where we can, the evidence bears this out.<\/p>\n<p><a href=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/John-phelan-pic.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-8147\" src=\"https:\/\/www.rationalargumentator.com\/index\/wp-content\/uploads\/2019\/09\/John-phelan-pic.jpg\" alt=\"\" width=\"100\" height=\"100\" \/><\/a><\/p>\n<p><strong>John Phelan is an economist at <a href=\"https:\/\/www.americanexperiment.org\/\">the Center of the American Experiment<\/a> and fellow of The Cobden Centre.<\/strong><\/p>\n<p><strong>This article was originally published by the <a href=\"https:\/\/fee.org\/articles\/4-ways-employers-respond-to-minimum-wage-laws-besides-laying-off-workers\/\">Foundation for Economic Education (FEE)<\/a>.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>John Phelan September 25, 2019 ************************* Most of you will be familiar with a supply and demand graph. This shows a demand curve, which graphs the relationship between the price of something and the quantity demanded of that something, as well as a supply curve, which graphs the relationship between the price of something and the quantity supplied of that something. It is probably the most basic\u2014and useful\u2014model in economics.Whether the something in question is a good or a service,&#8230;<\/p>\n<p class=\"read-more\"><a class=\"btn btn-default\" href=\"https:\/\/www.rationalargumentator.com\/index\/blog\/2019\/09\/responses-to-minimum-wage-laws\/\"> Read More<span class=\"screen-reader-text\">  Read More<\/span><\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[419,7,5],"tags":[22,18,836,5766,5764,5763,5765,21,4105,968,1012],"class_list":["post-8145","post","type-post","status-publish","format-standard","hentry","category-business-2","category-economics","category-politics","tag-demand","tag-economy","tag-jobs","tag-john-phelan","tag-minimum-wage-laws","tag-minumum-wage","tag-minumum-wage-public-policy","tag-supply","tag-supply-and-demand","tag-unemployment","tag-wages"],"_links":{"self":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts\/8145","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/comments?post=8145"}],"version-history":[{"count":4,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts\/8145\/revisions"}],"predecessor-version":[{"id":8159,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/posts\/8145\/revisions\/8159"}],"wp:attachment":[{"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/media?parent=8145"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/categories?post=8145"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.rationalargumentator.com\/index\/wp-json\/wp\/v2\/tags?post=8145"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}