Who’d a-Thunk It? Employers Respond Predictably to a Hike In the Minimum Wage

by Don Boudreaux on August 28, 2014

in Reality Is Not Optional, Seen and Unseen, Work

San Jose, CA, recently raised a tax that it imposes on the use of low-skilled workers its minimum wage.  One result is that an employer reduced the size of the annual bonuses that she pays to her employees.  (NPR has the story; this particular part starts at around the 3 minute, 25 second mark in the audio version of the report.  [What is called at this NPR link the "Transcript" is not a complete transcript of what you'll hear if you click "Listen to the Story".])

Note that these particular workers are among the lucky ones.  While the higher minimum wage didn’t help them, it didn’t hurt them – or at least not very much.*  When bonuses are factored in, these employees were, in fact, already being paid more than even the now-higher minimum wage.  So their employer merely had to rearrange the method by which she paid her employees: more in hourly wages and less in the form of bonuses.

But what if the workers in question were not so productive as to justify total hourly compensation as high as the new legislated minimum wage?  The employer would then have had to resort to less pleasant and more substantive means of adjusting to the higher minimum wage, means that likely would have included employing fewer such workers.

….

* I say “or at least not very much” because the particular method of compensation used – hourly wages in combination with bonuses – presumably serves some useful purpose for both the employer and the employees.  (My guess is that it is a means of rewarding – and, hence, of encouraging – greater employee productivity.)  By reducing the employer’s and employees’ flexibility in choosing the particular forms in which compensation is paid, the higher minimum wage reduces the ability of payment options to elicit optimal efficiency.

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