What is the real cost of rapidly increasing a minimum wage?

Here\’s a pretty good idea of it, excerpted from a sobering editorial in Investors Business Daily:

The Los Angeles City Council this week voted to raise the minimum wage to $15 an hour. But the effective cost for employers likely will spike to nearly $20, at least for full-time workers.

Once all the nonwage costs are added, including payroll taxes, paid sick leave and the big one – ObamaCare\’s employer mandate – minimum compensation for a full-time worker could rise as high as $19.28 an hour by 2020, an IBD analysis finds. That would amount to a jump of $10.67, or 124%, since June 2014.

Seemingly absent from the minimum-wage debate has been the reality that at $15 an hour, many workers will no longer qualify for Medicaid. Even single parents with two children who worked 40 hours a week would earn more than Medicaid\’s cutoff (if inflation stays at 2%).

In effect, the L.A. City Council is asking employers to lift their low-wage workers to the middle class and give them health insurance.

Here\’s how L.A. employers will see their cost of a full-time minimum-wage worker rise by $10.67 an hour from June 2014 to 2020.

Wages And Taxes: Including the $1-an-hour increase last July, wages and payroll taxes will rise $7.54 an hour.

Sick Leave: Three days of paid sick leave that take effect in June will add 19 cents to the hourly wage.

ObamaCare mandate: Employers with at least 50 full-time equivalent workers could face an ObamaCare penalty equivalent to $2.94 an hour in wages for each full-time employee who receives a subsidy to buy health coverage via the state exchange.

The per-worker penalty is $3,120 this year, rising to $3,240 in 2016. By 2020, assuming a similar pace, it will top $3,700. Unlike wages, the ObamaCare penalty is not deducted before taxes are paid. On a wage-equivalent basis, the fine could top $6,000 in 2020.

An employer might prefer providing health coverage to paying a penalty. But they will have another way of avoiding a fine: keeping workers below ObamaCare\’s full-time threshold of 30 hours per week. With low-end labor costs more than doubling, businesses also may close up shop, move out of L.A. city limits or automate more jobs.

Does that look problematic to you?  Very problematic?

Well, it\’s worse than it looks.

To illustrate, let me use the example of cigarette sales in New York City.

The politicians of New York City, and State have raised cigarette taxes so high, that the current cost of an individual pack in Manhattan is approximately $14 – $15 (no, that is not a typo). 

This, in the minds of the social-engineering purists, is supposed to stop people from smoking. 

The good news is that cigarette smoking is down in New York.  But, since smoking is down everywhere else as well, it seems clear that the dropoff is not related to high taxation. 

So the issue then becomes what effect oppressively high taxes have had on those who still do smoke.

Well, in 2013, the Pew Research center conducted a study which concluded that an astonishing 60% of all cigarettes purchased in New York have been smuggled in from other states with far lower taxes. 

Why?  Because cigarettes cost far less from smugglers than they do from legal retail outlets, that\’s why.

When smokers – even smokers who under other circumstances would never break the law – are faced with a choice of paying either $14 – $15 a pack, or half as much, for the same cigarettes, they pay half as much.  So the result is that a) there is still cigarette smoking, b) more than half the cigarettes purchased generate no tax revenue for New York at all, and c) the mob has a huge business handed to them on a silver platter by well meaning, but amazingly naive, social engineers.

In other words, sky-high cigarette taxation looks like a big winner on paper…but, in reality, is an even bigger disaster.

Now let\’s consider the consequences of Los Angeles, ( and Seattle and other cities) putting on their politically correct happy-faces and raising the minimum wage to $15..

Suppose you\’re an employer with X number of full-time employees, and now you are being compelled to pay thousands more to them…

That\’s right.  Them.  As in all of them. 

What do you think happens to salaries of other employees when the minimum wage is raised to $15?  If you have workers with two years experience earning $15 an hour now, do you think they will react to being paid the lowest legal amount, as if this were the first day of their jobs?  What about workers getting $20 an hour?  Will they just sit back, that much closer to the minimum wage, and say “Ok, that doesn\’t mean a thing to me”?

The reality is that a raise in minimum wage affects every wage, right up the scale.  Even in companies without any minimum wage workers.

So let\’s again consider employers with X number of full-time employees, who are now being compelled to pay thousands more to every one of them.

What will they do?

Will they be more receptive to hiring part-time workers rather than full-time?

Will they – even those who, under other circumstances, are law-abiding citizens  – be more receptive to paying less-skilled workers lower amounts “off the books” without any of the benefits legitimate workers would have to get?

And if they are, what will that do to the job market?  What will that do to the employment situation?  How will it impact legal workers who are at the lower end of the scale, who compete against people willing to work off the books? 

Personally, I favor a raise of the minimum wage;  one that is a) more gradual and b) implemented in a way that recognizes its effect on the overall job market and the realities of what people might do to get around it, rather than “on this date it goes up that much”.

But that is not what is being done in Los Angeles.  The way LA is addressing minimum wage, while no doubt thrilling to the social engineers who think they have struck a major blow for lower-end workers, is much more likely to be a disaster for them.

I hope I\’m wrong about this.  But I don\’t think I am.

Leave a Reply

Your email address will not be published. Required fields are marked *