The debate around raising a minimum wage typically centers on how it impacts both pay and employment. The higher hourly pay for beneficiaries is measured against any reduction seen in employment due to the higher labor costs for businesses (termed “disemployment”). In theory, policymakers then evaluate if the trade‐off is worth it.
The overwhelming majority of academic studies still find that raising minimum wages costs jobs, particularly for young, black, and low‐skilled workers. But in recent decades a large minority of studies have found no significant job loss effects, suggesting there may be little downside to minimum wage hikes. The question then becomes: why?
Advocates of higher minimum wages suggest that firms must have significant “monopsony power” in labor markets. In this world, a higher minimum wage could theoretically raise employment and pay concurrently. The evidence, they say, proves the theory.
But there are other more plausible explanations. One is that these research papers are often too narrow in scope. When Seattle increased its minimum wage aggressively at the start of the last decade, for example, some research found no employment loss in the restaurant sector. But the standard trade‐off nevertheless still held when looking at low‐wage work across all industries.
Another explanation is that these papers’ designs don’t capture well the impacts in real labor markets. A recent study by Priyaranjan Jha, David Neumark, and Antonio Rodriguez‐Lopez attempted to repeat previous work on the restaurant sector that had found no relationship between the minimum wage and employment when comparing counties that share a state border. Instead, they now looked at the impact of higher minimum wages by examining multi‐state commuting zones – a more accurate reflection of an economic area. This methodology found “a robust negative relationship between minimum wages and employment,” as standard theory would suggest.
Another potential explanation is that profit‐seeking employers adjust in other ways to mitigate their higher labor costs when the minimum wage is raised. Numerous papers have shown how minimum wage increases lead firms to harness other “margins of adjustment” including: greater use of noncompetes, a reduction in workers’ hours, altering schedules, imposing more rigorous work targets, or trimming other forms of employee remuneration and benefits.
A new pre‐print study by Mark Meiselbach and Jean Marie Abraham provides an example. Using the Medical Expenditure Panel Survey and looking at changes to state and federal minimum wage laws between 2002 and 2020, the pair examine the relationship between changes to minimum wage laws within a state and the provision of employer health insurance.
Their results are summarized below (my emphasis)
We examine the impact of state minimum wage increases on employer health benefit offerings using the 2002–2020 Medical Expenditure Panel Survey – Insurance/Employer Component data. Our primary regression specifications are difference‐in‐differences models that estimate the relationship between within‐state changes in employer‐sponsored insurance and minimum wage laws over time. We find that a $1 increase in minimum wages is associated with a 0.90 percentage point (p.p.) decrease in the percentage of employers offering health insurance, largely driven by small employers and employers with more low‐wage employees. A $1 increase is also associated with a 1.80 p.p. increase in the prevalence of plans with a deductible and three percent increase in average deductibles. We do not find consistent evidence that other benefit characteristics are affected. We find no consequent change in uninsurance, likely explained by an increase in Medicaid enrollment.
In other words: higher minimum wages reduce the likelihood that companies with fewer than 50 employees, or those with lots of low wage workers, will offer health insurance. For those that do, higher minimum wages tend to lead to a small offsetting increase in average deductibles. Both of which bring new costs to workers, even if they don’t show up as reduced employment.
