Evidence shows that higher minimum wages reduce other elements of worker compensation

According to the Bureau of Labor Statistics, the median hourly wage for all occupations in Minnesota is $19.84. But the wage a worker receives is not the total cost to the employer of employing that worker. As well as payroll taxes there are other benefits, such as health insurance, which make up total compensation. These have to be added to the wage to get the total cost to the employer of hiring a worker.

I’ve written before about the Real Iron Law of Wages. An employer will not pay an employee more than they think that employee will add to revenues. If they did, they would be hiring the worker in the expectation of losing money on the hire, not something a business with a bottom line to think about would do.

But the employer is thinking in terms of total worker compensation, the amount they have to pay, not the wage received by the worker, which is just some portion of that. For example, if an employer thinks a worker will add $30ph to their revenues, they might pay that worker $15ph in wages and pay $14ph towards healthcare (leaving out payroll taxes for simplicity). Or they might pay $20ph in wages and $9ph in healthcare.

But they will not pay any amount of the two together which is above $30ph. That would breach the Iron Law. If a minimum wage law decrees that a worker previously paid $10ph should now get $15ph, if there has been no corresponding rise in the employer’s estimate of the worker’s contribution to revenues, they will not increase their overall compensation. Instead, they will pay the higher wage and cut back on the other elements of compensation.

So much for the theory. But a new paper from economists Jeffrey Clemens, Lisa B. Kahn, and Jonathan Meer finds that this is exactly what happens in practice too.

The authors “explore the theoretical and empirical relationship between the minimum wage and fringe benefits, with a focus on employer-sponsored health insurance.” They 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. We find evidence that both insurance coverage and wage effects exhibit spillovers into occupations moderately higher up the wage distribution. For these groups, reductions in coverage offset a more substantial share of the wage gains we estimate.”

Simply put, as the minimum wage rises other elements of worker compensation fall. The ‘Fight for 15’ is fixated on only part of worker compensation. They may get $15ph in wages. But theory and evidence suggest that it won’t be corporate profits that are hit, but other elements of worker compensation. There really is no such thing as a free lunch.

John Phelan is an economist at the Center of the American Experiment.