John Locke Update / Research Newsletter

Minimum wage increase + payroll taxes + Obamacare = a one-two-three punch for low skilled workers

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Progressives everywhere are calling for an increase in the minimum wage. (For a look at the progressive movement’s historical support for the minimum wage see this article.) The amount of the increase depends on who is calling for it. President Obama wants a 40 percent hike from the current minimum $7.25 to $10.30 per hour, while others, including some trade unions, are asking for more than a 100 percent increase to $15.00 an hour. In other words, employers and employees would have two choices. For employers, the choices would be to either hire someone at or above the new minimum, whatever is adopted, or not employ them at all. For workers, the choices would be either find a job at or above the new minimum or don’t be employed at all. In other words, if a potential employee could find a job at $8.00 an hour but does not have the skill levels required to find a job at $10.30 or $15.00 an hour, he would be out of luck.

 

This is the econ 101 assessment of the impact of minimum wage and why economists generally argue that minimum wage laws cause unemployment among the lowest skilled workers in the economy. But, in reality, while minimum wage laws put a floor on hourly wages, the actual legal floor on the cost of employing a worker is significantly higher. In fact, if the bottom end of this range, President Obama’s proposed increase to $10.30, is put in place, the real cost of hiring an employee at the new minimum wage could be well over 30 percent higher than that, depending on how many hours the employee works and how big the employer is. This means that a potential employee has to have a high enough level of skill to be hired not only at the new minimum wage, but at a cost to the employer of over $3.00 an hour more than that.

 

There are four laws that are responsible for this, but going forward one will have a much larger impact than any of the other three. The first two are familiar to anyone who receives a regular paycheck. These are the laws mandating employer contributions to Social Security and Medicare. Combined the two programs require that, in addition to a worker’s wage, the employer must pay in an additional 7.6 percent of that wage. At a minimum wage of $10.30 per hour this amounts to an additional cost of 78 cents per hour to hire someone. In addition, the federal government requires that the employer kick in another 6 percent for unemployment insurance on a worker’s first $7000 of income. For a low-income minimum wage worker this could be a significant portion if not all of his annual pay. This brings the cost of hiring someone at Obama’s proposed minimum wage up to $11.70 an hour.  (Note: this number is an underestimate, because there are also state unemployment taxes that vary significantly and are not counted here.)

 

But the most devastating hit to serious employment opportunities for low skilled workers will come from the employer mandate under Obamacare, which will take effect in January. This mandate will require that any employee working over 30 hours per week for a company that employs 50 or more workers will have to be provided with health insurance as part of his or her compensation package. If a company meeting these requirements chooses not to provide health insurance then, according to an estimate by University of Chicago economist Casey Mulligan, it must pay a fine that will amount to about $3000.00 per employee. The reason why the per employee cost of the fine is $3000 rather than the $2000 in the Obamacare statute is that the fine, unlike the cost of health care, is not tax deductible for the company, so the lost tax benefit has to be added to the $2000. It should be noted that this fine is scheduled to increase to coincide with the rate of health care inflation.

 

Since most analysts believe that the amount of the fine will be less than the cost of health care we can assume that the additional cost to hiring an employee, in terms of a legal floor, will be $3000. The amount per hour that will have to be added to the cost of hiring someone will depend on how many hours per week he or she is working. But it will range from $1.45 per hour for someone working 40 hours per week up to $1.92 per hour for someone working 30 hours per week. This means that at a minimum wage of $10.30 per hour it will cost an employer from $13.62 for an employee working 30 hours to $13.15 for someone working 40 hours per week. Of course, a way to avoid these Obamacare costs, but not the others, is to make sure that these minimum wage employees work only 29 or fewer hours per week, essentially putting a cap on their take home pay or forcing them to work more than one job.

 

So where does this leave lower skilled workers, i.e., the least advantaged workers in our economy: high school drop outs, teenagers and black teenagers in particular, those who have been subject to poor quality rural and inner city schools, and those who may have faced an undisciplined or dysfunctional home life? Remember the minimum cost of hiring these folks would not be Obama’s $10.30 an hour but anywhere from $13.15 to $13.62 an hour. What this means is that, in order to be hired for any job that is not very part time, the value of a person’s productive output per hour to any employer would have to be something close to $14.00. Otherwise the person will face certain unemployment. (I am not considering the possibility of an increase to $15 per hour, but obviously if that were the case the problems discussed here would be dramatically worse.)

 

For those progressives who claim that no one will be unemployed as a result of an increase in the minimum wage to the levels currently being contemplated, one of two things must be true. Either there has to be no one whose skill levels are so low that they can’t produce well over $13.00 an hour worth of output for potential employers or employers don’t see hiring as a profit yielding investment but as charity. The first possibility is an empirical assumption that would have to be proven, and with a 28 percent unemployment rate among black teenagers it would appear that that proof is not forthcoming. The second assumption? Well, that’s just silly. Everyone knows that all employers are nothing but greedy businessmen out to exploit workers.

 

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Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He also holds the title of Lecturer at… ...

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