Why Employers Won’t Fire People If We Raise The Minimum Wage
Posted: Thu Feb 14, 2013 9:06 pm
By Igor Volsky on Feb 14, 2013 at 12:55 pm
Republicans are responding to President Obama’s proposal raise the federal minimum wage by arguing that requiring businesses to pay their workers at least $9 an hour would lead employers to shed jobs or increase prices and pass the costs onto consumers.
“When you raise the price of employment, guess what happens? You get less of it,” House Speaker John Boehner (R-OH) said at a House Republican press conference on Wednesday. Sen. Marco Rubio (R-FL) agreed, explaining that “the impact of minimum wage usually is that businesses hire less people.” It’s a fairly logical and simple argument: increasing the cost of labor causes competitive employers to cut employment or hours to make up for the additional cost, hurting the very low-skilled workers that the policy was designed to benefit in the first place.
The problem? What sounds perfectly reasonable in theory doesn’t actually hold up in the real world and the overwhelming empirical consensus shows little if any effect of the minimum wage on employment.
For instance, in 2009 researchers conducted a review of 64 minimum-wage studies published between 1972 and 2007 measuring the impact of minimum wages on teenage employment and when they graphed “every employment estimate contained in these studies (over 1,000 in total), weighting each estimate by its statistical precision, they found that the most precise estimates were heavily clustered at or near zero employment effects.” The following year, researchers published a study comparing restaurant employment differences across 1,381 U.S. counties with different levels of the minimum wage” in every quarter between 1990 and 2006. Their conclusion: “The large negative elasticities in the traditional specification are generated primarily by regional and local differences in employment trends that are unrelated to minimum wage policies.”
The findings raise an important question: if employers aren’t responding to minimum wage increases by the seemingly logical action of cutting employment — which is what Republicans predict — then, what are employers doing?
John Schmitt finds the answer in a paper out this month for the Center for Economic and Policy Research. After reviewing the available data, he concludes that employers react to minimum wage increases by adjusting their practices in a wide range of ways, some of which can strengthen their businesses and the economy as a whole:
As Joel Benoliel, senior vice president and chief legal officer at Costco, told CBS News, “If you have the best people in the marketplace working very hard because they’re being paid better, you end up spending less on labor, not more.” “There’s a fundamental misunderstanding among many employers who focus on how little they can pay. Our philosophy is that we actually pay less for labor per hour when we look at productivity and sales per hour,” he said.
Different employers will react in different ways, some reducing the benefit of the minimum wage for workers, others improving their well-being. The GOP’s doom and gloom predictions, however, are unfounded and contrary to their rhetoric, the majority of low‐wage workers “are not employed by small businesses, but rather by large corporations with over 100 employees.” These companies have largely recovered from the recession and can afford to pay their employees more.
In fact, the three largest employers of minimum wage workers, Wal‐Mart, Yum! Brands (Pizza Hut, Taco Bell, and KFC), and McDonald’s, all are more profitable than they were before the Great Recession and “have awarded their top executives multi-million dollar compensation packages.”
Republicans are responding to President Obama’s proposal raise the federal minimum wage by arguing that requiring businesses to pay their workers at least $9 an hour would lead employers to shed jobs or increase prices and pass the costs onto consumers.
“When you raise the price of employment, guess what happens? You get less of it,” House Speaker John Boehner (R-OH) said at a House Republican press conference on Wednesday. Sen. Marco Rubio (R-FL) agreed, explaining that “the impact of minimum wage usually is that businesses hire less people.” It’s a fairly logical and simple argument: increasing the cost of labor causes competitive employers to cut employment or hours to make up for the additional cost, hurting the very low-skilled workers that the policy was designed to benefit in the first place.
The problem? What sounds perfectly reasonable in theory doesn’t actually hold up in the real world and the overwhelming empirical consensus shows little if any effect of the minimum wage on employment.
For instance, in 2009 researchers conducted a review of 64 minimum-wage studies published between 1972 and 2007 measuring the impact of minimum wages on teenage employment and when they graphed “every employment estimate contained in these studies (over 1,000 in total), weighting each estimate by its statistical precision, they found that the most precise estimates were heavily clustered at or near zero employment effects.” The following year, researchers published a study comparing restaurant employment differences across 1,381 U.S. counties with different levels of the minimum wage” in every quarter between 1990 and 2006. Their conclusion: “The large negative elasticities in the traditional specification are generated primarily by regional and local differences in employment trends that are unrelated to minimum wage policies.”
The findings raise an important question: if employers aren’t responding to minimum wage increases by the seemingly logical action of cutting employment — which is what Republicans predict — then, what are employers doing?
John Schmitt finds the answer in a paper out this month for the Center for Economic and Policy Research. After reviewing the available data, he concludes that employers react to minimum wage increases by adjusting their practices in a wide range of ways, some of which can strengthen their businesses and the economy as a whole:
- 1. Improving efficiency. An increase in the minimum wage may lead employers to encourage employees to work harder, since they’re now being paid more. Such an adjustment may be preferable to “cutting employment (or hours) because employer actions that reduce employment can ‘hurt morale and engender retaliation.’” A review of 81 fast-food restaurants in Georgia and Alabama found that “90 percent of managers indicated that they planned to respond to the minimum-wage increase with increased performance standards such as ‘requiring a better attendance and on-time record, faster and more proficient performance of job duties, taking on additional tasks, and faster termination of poor performers.’”
2. Increasing demand. Raising the minimum wage may increase demand for goods and services and bolster consumer spending, offsetting the increase to employer costs. One study estimates “that an increase in the minimum-wage
from its current level of $7.25 per hour to $9.80 per hour by July 2014 would increase the earnings low-wage workers by about $40 billion over the period” and create some 100,000 jobs.
3. Lowering turnover. A higher minimum wage “makes it easier for employers to recruit and retain employees” and may even “compensate some or all of the increased wage costs, allowing employers to maintain employment levels.” One study found “striking evidence that separations, new hires, and turnover rates for teens and restaurant workers fall substantially following a minimum wage increase…”
4. Increasing prices. A comprehensive review of more than 30 academic papers on the price effects of the minimum wage found that “most studies reviewed above found that a 10% US minimum wage increase raises food prices by no more than 4% and overall prices by no more than 0.4%”; and “[t]he main policy recommendation deriving from such findings is that policy makers can use the minimum wage to increase the wages of the poor, without destroying too many jobs or causing too much inflation.”
As Joel Benoliel, senior vice president and chief legal officer at Costco, told CBS News, “If you have the best people in the marketplace working very hard because they’re being paid better, you end up spending less on labor, not more.” “There’s a fundamental misunderstanding among many employers who focus on how little they can pay. Our philosophy is that we actually pay less for labor per hour when we look at productivity and sales per hour,” he said.
Different employers will react in different ways, some reducing the benefit of the minimum wage for workers, others improving their well-being. The GOP’s doom and gloom predictions, however, are unfounded and contrary to their rhetoric, the majority of low‐wage workers “are not employed by small businesses, but rather by large corporations with over 100 employees.” These companies have largely recovered from the recession and can afford to pay their employees more.
In fact, the three largest employers of minimum wage workers, Wal‐Mart, Yum! Brands (Pizza Hut, Taco Bell, and KFC), and McDonald’s, all are more profitable than they were before the Great Recession and “have awarded their top executives multi-million dollar compensation packages.”
