New evidence shows higher minimum wage means fewer benefits for workers

Within the last year, every province in Canada has seen an increase in the minimum wage rate—most notably Canada’s most populous province, Ontario, saw an increase of 21 per cent from $11.60 to $14 per hour. But raising the minimum wage comes with a number of unintended consequences that hurt workers.

Much focus is given to the loss of job opportunities associated with a minimum wage increase, but there are adverse consequences even for those who retain or find a job. An often overlooked consequence of a higher minimum wage is that it means many of the workers most affected by the minimum wage hike lose out on fringe benefits.

Why would a higher minimum wage mean fewer benefits?

A higher minimum wage means that governments are mandating higher labour costs for many employers. One way that employers offset this increase is by reducing non-wage compensation or the fringe benefits that employees receive. In addition to the existing evidence, a recent study from the United States, published by the National Bureau of Economic Research, provides new evidence of benefit reductions in the wake of minimum wage increases.

This study focuses on minimum wage increases across American jurisdictions between 2011 and 2016 and the effect that raising the minimum wage has on health insurance coverage of American workers. Specifically, they measure the incidence of health insurance coverage for American workers in what the authors term very low-wage occupations (such as food services), the group that are most likely to be affected by a minimum wage increase.

The study finds that a higher minimum wage does reduce health insurance coverage. Specifically, for every $1 the minimum wage was increased, coverage would drop by 2 per cent to 4 per cent for workers in very low wage occupations. The authors point out that this is likely a low estimate of the overall effect on health insurance benefits because they could only measure reduction in coverage not reductions in the generosity of health insurance coverage.

Low wage workers who can retain or find employment may enjoy an increase in wages from a minimum wage hike, but this is offset in many cases with reductions in fringe benefits. In some cases workers may be worse off depending on how much they value the lost benefits relative to the higher wage.

This is an important adverse consequence of the minimum wage that is too often overlooked in public debate.