Employers offset minimum wage increases with decreases in fringe benefits

Employment compensation is made up of the wage that employees are paid, plus other fringe benefits that employers provide. Those fringe benefits might include training opportunities, discounted (or free) goods and services, use of a vehicle, travel and accommodation, health insurance, superannuation contributions, and so on.

If we consider a very simple model of labour demand, employers will employ any worker where the value of the marginal product of labour (essentially, the amount of profit contribution that the worker makes for the employer) is greater than the total compensation paid to that worker. If wages rise, then a bunch of workers will not be making enough profit contribution for the firm any more, and they will be laid off. This is the basis for the downward sloping demand curve for labour.

However, employers mostly don't want to lay off workers when wages rise. So, rather than laying workers off, employers could seek to reduce the other fringe benefits they provide, keeping total compensation low even though wages have increased.

Now consider workers on the minimum wage. Realistically, they don't receive all of the fringe benefits I listed in the first paragraph. However, they may receive discounted goods or services, training opportunities, or (in the U.S. at least) health insurance. So, is there evidence to support the assertion that employers reduce fringe benefits for low-wage workers when the minimum wage increases? There is an old literature on the effects on training, but a new NBER Working Paper (ungated version here) by Jeffrey Clemens (UC San Diego), Lisa Kahn (Yale), and Jonathan Meer (Texas A&M) looks at the impact on employer-provided health insurance.

Clemens et al. use data from the American Community Survey over the period 2011-2016. They can't observe actual wages paid to the survey respondents, but they can look at what happens to those in different occupations. To this end, they separate occupations into those that are Very Low paying, Low paying, Moderate paying, Middle paying, and High paying. Bigger effects are expected for the Very Low paying occupations, where changes in the minimum wage are more likely to affect respondents.

Unsurprisingly, they find that increases in the minimum wage are associated with higher wages:

We find that a $1 minimum wage increase generates significant wage increases for workers in low-to-modest paying occupations. At the 10th percentile, increases are on the order of 12% and 9% for Very Low and Low paying occupations, respectively, and even 3% for Modest paying occupations.

However, those wage increases are offset by decreases in health insurance coverage:

For those in Very Low and Low paying occupations, we find that a $1 minimum wage increase is associated with a 1 to 2 percentage point (2 to 4%) reduction in the probability of coverage. We also estimate a 1 percentage point (1.5%) loss in coverage for those in Modest paying occupations, suggesting a non-trivial role for spillovers. Losses in employer coverage manifest largely among employed workers, rather than through impacts of the minimum wage on employment. 

It's not all bad news though, because the lost value of employer contributions doesn't fully offset the increase in wages:

When we compare wage changes to changes in employer coverage, we find that coverage declines offset a modest 9% of wage gains for Very Low wage occupations and a larger fraction for the Low and Modest groups (16% and 57%, respectively). The offsets we estimate are, unsurprisingly, much larger for the latter groups that experienced relatively small wage gains following minimum wage hikes.

However, because they can't observe whether employers reduce the extent of insurance coverage (such as by choosing plans for their employees that have higher co-pays), the extent of offset could be worse than these results suggest.

Finally, in the simple discussion of the minimum wage that we engage in during ECONS101 and ECONS102, we tend to suggest that at least those workers who receive a higher minimum wage and keep their job (that is, they aren't made unemployed by the decrease in quantity of labour demanded) are made better off. That might not be true. Say that employers are able to buy health insurance at a discount to the general public (perhaps because of risk pooling across their workforce, or quantity discounts, or kickbacks from the insurance provider). When the employer reduces spending on health insurance to offset the higher minimum wage and restore the original level of total compensation for a worker, the cost to the worker of the health insurance they have lost could well be much greater than the gain in wage earnings, because it would cost them more than it costs the employer to restore the same level of health insurance coverage.

Overall, these results need to be read alongside the literature on the employment effects of the minimum wage. They also have interesting implications for the living wage movement, although I haven't seen any living wage advocates engaging with total compensation as a concept at all, when they definitely should.

[HT: Marginal Revolution, followed by Offsetting Behaviour]

Read more:

• Don't fear minimum wage increases because of their effects on the cost of living
• Increases in the minimum wage are effectively paid by consumers, but they lower inequality anyway
• Raising the minimum wage to $20
• The latest evidence supports negative employment effects of the minimum wage
• Latest research suggests the minimum wage DOES reduce employment