A CEO gets a lesson in economics
Different workers produce different outputs. This is valued differently and, thus, compensated differently: "We realized that we had to pay attention to market forces"
Minimum wage hikes make certain workers more expensive to hire. Generally speaking, if something becomes more expensive, people buy less of it, so we would expect minimum wage hikes to reduce the employment of these workers.
The empirical evidence is less clear than we might like for a variety of reasons but, as my colleague Martha Njolomole pointed out recently, on balance it finds that the demand for labor does follow these rules: if it becomes more expensive, people buy less of it. Research finds that there are a number of ways employers can do this without simply laying people off. They can cut the number of hours each worker works so that they are buying less labor at the higher price. They can make employees work harder, so that the price paid for a unit of labor is unchanged. Or they can cut other elements of remuneration, such as health insurance, so that, while the wage might increase, the total cost to the employer doesn’t.
But, sometimes, they do just can the worker, as a new paper by economist Jan Kabátek shows.
The minimum wage in the Netherlands rises by steps for workers between 15 and 21 and from the age of 23, they become eligible for the “adult” minimum wage which does not increase further. In a paper titled ‘Happy Birthday, You’re Fired! Effects of an Age-Dependent Minimum Wage on Youth Employment Flows in the Netherlands,‘ (which is fairly self-explanatory) Kabátek looks at the effects of these hikes on employment. He finds that:
“…the birthday discontinuities of age-dependent minimum wage rates affect both labor market entry (job accessions) and labor market exit (job separations) of minimum wage workers. The job separations spike in the three months that precede workers’ birthdays, suggesting that firms are dismissing workers whose costs are about to go up. The frequency of job accessions increases immediately after the birthdays and the increase is sustained throughout the following months. The resulting effect on employment levels is dynamic, with the employment rate being subject to an initial drop that is gradually compensated for by the higher rates of post-birthday labor market entry.”
In short, employers are more likely to sack their employees as their birthdays – and a hike in their wages – approaches.
You might not like this finding but that doesn’t mean you can dismiss it. Maybe there are benefits of having a minimum wage which offset these costs. But we have to acknowledge that these costs exist.
John Phelan is an economist at the Center of the American Experiment.