By Ryan Bourne, Cato Institute

 

In both his Cato paper and then an article for the Journal of Economic Perspectives, UC San Diego economist Jeff Clemens delineated the full range of ways any business might adjust to a minimum wage hike.

 

Most empirical research has focused on whether firms cut jobs or hours. Other work has examined whether businesses pass through any cost uplift to consumers in the form of higher prices. But, Clemens said, there are a range of other ways businesses might seek to offset a minimum wage hike, including scaling back other worker “benefits,” reducing the quality of the work environment, or even playing around with work schedules.

 

What firms choose to do will obviously depend on the market they operate in and the circumstances they face. But until recently the empirical evidence on these other “channels of adjustment” has been limited. In the UK, two papers have found that companies react to minimum wage hikes by making greater use of contracts that do not guarantee set hours for workers. But here in the U.S. richer data on the composition of workforces and their schedules has not really been explored.

 

Until now. For that is exactly the sort of data Qiuping Yu, Shawn Mankad, and Masha Shunko have examined in their new study on the impact of minimum wage hikes on a medium‐​sized U.S. fashion retail chain. Harnessing information on an hourly paid workforce for a mystery company from 2015 to 2018, the trio use a difference‐​in‐​differences estimation technique to compare how the company’s stores in California adjusted to successive minimum wage hikes compared with stores in Texas, a state which did not increase its minimum wage.

 

Their results are striking. The minimum wage hikes are found to have no impact on overall hours worked at the California stores. So, if one was looking at hours alone as a proxy for employment, you might conclude that “the minimum wage has no apparent effect on employment.” Yet the researchers find that the business changes its workforce composition and scheduling significantly to try to mitigate the cost increase of the rising wage floor.

 

First, the number of workers making up those total hours increased significantly–i.e. the company used more workers working shorter hours. When the minimum wage increases by $1, the number of workers scheduled to work each week goes up by 27.7 percent, while the average hours per worker per week falls by 20.8 percent. So the average worker would be 13.6 percent worse off in terms of total wages when the minimum wage was increased from $11 to $12 per hour. But, crucially, this move to more short‐​time workers saves the company significant amounts of money by reducing the number of workers eligible for retirement and healthcare benefits.

 

Hourly workers are only eligible for retirement benefits if they work at least 1,000 hours per year, which is about 20 hours per week. The Affordable Care Act requires employers to offer health insurance to employees working at least 30 hours per week to avoid paying penalties. Following a $1 minimum wage hike, the economists find the number of workers working over 20 hours per week and 30 per week falls by 23.0 percent and 14.9 percent respectively. For the average store, this reduction in benefit eligibility from this new workforce would produce cost savings equivalent to 27.5 percent of the increased hourly wage costs.

 

But the adjustments don’t stop there. The researchers also find the stores in California use less consistent schedules after minimum wage hikes, with more volatility both in the number of hours employees work per week and the timing of their shifts. This volatility is most severe for workers who have spent less time with the company. The thinking is that, faced with a higher minimum wage, the company opts to try to control costs more closely by only using labor when stores are expected to be busy.

 

Observing these outcomes then is important for the broader debate about the impact of a major federal minimum wage hike. Advocates often talk as if employees would be unambiguously better off if overall employment levels for minimum wage workers held firm at a higher mandated wage. But if companies reduce individual workers’ hours or make their schedule less certain, then that can reduce the worker’s economic welfare by restricting their access to benefits and bringing more insecurity of income.

 

The simple truth remains that unless businesses know less about what wage rates make their business most profitable than politicians, or unless they are willing to charitably accept sustained hits to their bottom line, then they will seek to adjust other costs or prices to compensate for any minimum wage hike. Tinkering with schedules and which staff cover shifts are adjustments that many low‐​margin businesses in competitive markets might explore.

 


Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including fiscal policy, inequality, minimum wages, infrastructure spending, and rent control.