What Are The Broader Impacts of the Minimum Wage?

The Issue:

Debates about the minimum wage tend to be about whether raising it leads to a reduction in employment, typically focusing on job losses soon after the minimum wage is raised. Evidence on the short-run impact of the minimum wage on the number of jobs is mixed, and controversial (see here and here for opposing views). What gets lost in this debate, however, is the multifaceted nature of work and the many types of adjustment that can, and do, occur in the workplace. The focus on short-term job loss presents a stark and limited view of the way in which employers and employees interact. Research shows that there is a range of ways that the nature of jobs, the types of compensation, and the type of workers employed, respond to changes in the minimum wage. This research offers a more nuanced, and more realistic, view of the consequences of changes in the minimum wage.

Raising the minimum wage can impact many aspects of work, and the adjustments can be felt over long time horizons.

The Facts:

• Reducing the number of jobs is only one way that a higher minimum wage may affect the workplace. Reducing the number of jobs can be drastic adjustment for employers. Doing so can mean changing the nature of a business’s operations in a way that is difficult to do quickly. For example, innovations in the fast-food industry towards less labor-intensive processes could take over a decade (see here). More generally, firing workers is often bad for morale; over 60 percent of surveyed organizations report decreased morale among remaining employees.
• There are a number of ways that the nature of a job can change in response to a higher minimum wage, including the effort expected from a worker, a point that has been known for over a century. Analyzing the effects of an increase in the minimum wage in Oregon in 1914, Marie Obenauer and Bertha von der Nienburg found that workers reported being “under constant pressure from their supervisors to work harder; they are told the sales of their departments must increase to make up for the extra amount the firm must pay in wages.” This type of response persists over the decades. A 2015 study found that 90 percent of fast-food managers reported increasing performance standards as their primary cost-saving practice in response to a minimum wage increase; many also reported that they would try to “get more work from each person” and “expand job duties.”
• The workplace environment can change in response to a higher minimum wage in other ways as well. Hours of work can be reduced: a recent study found that hours worked in low-wage jobs fell by 6-7 percent when the minimum wage increased from $11 to $13 in Seattle. Those hours may also become less flexible. Restaurant managers frequently report changing shift schedules to “more tightly match beginning and ending times with customer demand” after minimum wage increases. Employers may also cut benefits to offset higher wage costs. In an analysis of state-level minimum wage changes using data from 2011 to 2016, Jeffrey Clemens, Lisa Kahn, and I find that reductions in the provision of employer health insurance offset at least 10 percent of wage gains for low-wage workers.
• An increase in the minimum wage can also alter the types of individuals hired. Evidence shows that employers tend to shift towards workers who are older and more credentialed when the minimum wage is raised. My co-authors and I find that young adults aged 16 to 21 see their share of employment in low-wage occupations drop by 5 percent after minimum wage increases, while dropouts lose 4 percent of their share of employment. Other studies also find substitution away from unskilled workers, while an experiment with an online job platform found that employers subject to a minimum wage sought out more productive workers. Similarly, researchers found that income gains from recent increases in Seattle’s minimum wage accrued entirely to more-experienced workers. Even among teenagers, research finds that employers substitute towards those from more affluent and educated families when the minimum wage is higher, with teenagers whose parents have a postgraduate degree being three times more likely to have a positive employment outcome than those whose parents have a high school degree or less. These shifts in the pools of workers hired in response to a higher minimum wage call into question whether, in fact, the minimum wage is an effective tool for combatting poverty and inequality, a point discussed in more detail in my earlier EconoFact memo.
• The largest effects of the minimum wage are likely to be over longer horizons, than a few months, or even a year, after it is raised. While there is little evidence that firings increase in response to an increase in the minimum wage, there is evidence that the rate of hiring falls and the rate of job growth is reduced over a period of several years. This means that it takes time for employment effects to be reflected in the number of jobs. One potential reason for slow adjustment is that changes in the minimum wage prompt changes in the way the companies operate, and these changes only occur slowly (see here and here). For example, there may be fewer waiters when a restaurant shifts to phone-app-based ordering or ordering using kiosks, customers may pump their own gas, check out their own groceries at supermarkets, pour their own beer, or use counter service, even at high-end restaurants.