Photo by Nana Smirnova on Unsplash

Erasing a Raise

Minimum wage increase can exact an unintended toll on workers intended to benefit

Photo by Nana Smirnova on Unsplash

Debate over raising the federal minimum wage is raging across the country. Proponents contend that a living wage is essential to the welfare of low-paid workers in retail, hospitality, service, manufacturing and supply chain jobs.

But an across-the-board boost to baseline pay can trigger unintended consequences on the workers it is meant to benefit, according to new research co-authored by Masha Shunko of the University of Washington Foster School of Business.

Masha Shunko

Her analysis of a national retail fashion chain finds that an increase in the minimum wage can actually harm employees who find themselves working fewer hours, qualifying for fewer benefits and managing schedules that are less consistent and predictable.

“People often assume that a higher minimum wage means that workers get more money. But that assumes that nothing else changes in terms of employment, hours and scheduling,” says Dr. Shunko, an assistant professor of operations management at Foster. “We show empirical evidence that a raise in the minimum wage leads to changes in company’s workforce scheduling practices that reduce labor costs but are detrimental to workers’ welfare.”

Something has to give

Ever since the federal minimum wage was first introduced in 1938 (at $0.25 per hour), people have formed strong opinions about its cost, its benefits, its very existence—and what, exactly, is the fair rate of basic compensation at a given time and in a given place.

The topic has hit the front burner in recent weeks, as the Biden administration attempted unsuccessfully to include a graduated increase in the minimum wage—from $7.25, where it has been fixed since 2009, to $15 over the next five years—in its $1.9 trillion pandemic stimulus package.

While the federal minimum has remained unmoved for over a decade, some states (California, New York) and cities (San Francisco, NYC, Seattle) have raised their local minimum wages in the past few years.

“Policy makers should consider coupling any minimum wage increase with additional mechanisms that protect work hours and schedules, so that the easiest way of paying for a higher minimum wage is not one that hurts employees.”

-Masha Shunko

But what strikes the lowest-paid stratus of workers as a modicum of equity is seen by critics as an undue economic tax on businesses. Especially businesses operating on thin margins.

If they wish to protect profits, employers face a dilemma. The additional costs incurred by a mandated pay raise generally have to come out of the pockets of either customers or employees.

To find out the potential risk to minimum wage employees, Dr. Shunko collaborated with Qiuping Yu of the Georgia Institute of Technology and Shawn Mankad of Cornell University.

The researchers analyzed comprehensive labor data from a national fashion retailer between January 2015 and March 2018. They viewed scheduling details for all 5,760 workers across two states. Stores in California, where the minimum wage increased incrementally from $9 every six months during the study, served as the experimental condition. Stores in Texas, where the minimum wage of $7.25 remained fixed throughout, served as the control.

Erasing a raise

The analysis revealed that an increase in the minimum wage had a negligible impact on the total number of labor hours employed by the retailer. But the number of workers scheduled to work each week went up while the average hours per worker went down.

The researchers estimate that an $1 increase in minimum wage led to a 28% increase in the number of workers scheduled per week, but a 21% reduction in weekly hours per worker. For an average store in California, these changes translate into four extra workers and five fewer hours per worker per week.

In other words, there goes your raise.

A raise in the minimum wage can prompt employers to take money out of workers’ hands. Photo by Madison O’Friel on Unsplash.

Such scheduling adjustments not only reduce the total wage compensation per worker but may also reduce benefits—moving part-timers outside of 20- or 30-hours-per-week threshold to be eligible for health insurance or retirement accounts.

And a final troubling pattern emerged in the data: weekly and daily schedules became far less consistent and predictable after a minimum wage increase. This adds another layer of challenge to employees who need to coordinate a second job, childcare or other personal demands.

Making a minimum wage work

Raising the minimum wage is intended to raise the standard of living for workers who cook our food, clean our hotel rooms, watch our children, process our packages.

But achieving this end is not easily accomplished.

Dr. Shunko suggests that changes in minimum wage should be carefully calibrated—both in the amount of increase and in ways for companies to handle the extra economic burden.

“Policy makers should consider coupling any minimum wage increase with additional mechanisms that protect work hours and schedules,” she says, “so that the easiest way of paying for a higher minimum wage is not one that hurts employees.”

The financial burden, she adds, could be shared by companies and governments, at least in the short term.

The Unintended Labor Scheduling Implications of Minimum Wage” is the work of Qiuping Yu, Shawn Mankad and Masha Shunko.

Ed Kromer Managing Editor Foster School

Ed Kromer is the managing editor of Foster Business magazine. Over the past two decades, he has served as the school’s senior storyteller, writing about a wide array people, programs, insights and innovations that power the Foster School community.