By: Troy Bryant, CEO, Doorstep Mobile Tax
Likely Effects of a Higher Minimum Wage:
1. More productive workers will keep their job; poor performers will lose jobs:
Employers mandated with a higher minimum wage will most certainly move quickly to dismiss underperforming employees and assign additional tasks to more motivated workers. Some employers may elect to pay a few hours of overtime to a more select workforce and eliminate other workers; while in companies where a substantial number of minimum wage employees currently enjoy overtime, employers may opt to hire additional workers, eliminate overtime and potentially reduce full-time status for others. Regardless of the method used, aggressive employers will push back against the new wage laws, crunch numbers and adjust as necessary to optimize employee cost. Many minimum wage workers, likely most of them, will suffer the consequences. Since higher minimum wages will most certainly affect a sudden decrease in job openings, those who keep their jobs will be forced to succumb to employers’ stricter demands or face potential job loss.
2. Although thinning out his or her employee base, reducing overtime or other direct employee cost adjustments will help to offset the effect of higher minimum wages, head count adjustments alone will not fully reduce the sting of a higher minimum wage. As a result, technology innovators, from fast food to janitorial, retail and manufacturing suppliers, will aggressively begin to offer new innovations for automating tasks currently performed by minimum wage workers. Currently the threshold for some of these technologies may not be cost effective for a business owner to implement. However, with the proposed wage hike, these new technologies may be more cost effective than paying a much higher minimum wage.
Note: An increase from $7.25/hour to only $12/hour for a 40 hour work week, per employee, plus the increase in employer FICA tax matching would increase an employers WEEKLY per employee cost by approximately $220 (would be slightly higher or lower based on employers’ State). Wow, imagine how much of an immediate negative impact this would have on a business with low gross margins and a significant number of minimum wage employees!
3. Some businesses would likely move from a higher minimum wage state into a lower minimum wage state, or move operations to another country. This would not likely be a viable option for the fast food and other retail industries. However, although the minimum wage argument has focused on “fast food” and “retail” workers, a significant number of minimum wage workers do not work in fast food or retail; therefore, moving operations would likely upset the economies of states adopting higher wages, and provide a boost for states that maintain a lower minimum wage.
4. Skilled and semi-skilled workers currently earning the equivalent of the proposed minimum wage (or wages near to the proposed increased minimum wage) will become disgruntled and demand higher pay, further affecting an employer’s move to offset the sudden new expense by reducing head count and further implementation of new technology to replace workers.
5. Currently, minimum wage workers at $7.25/hour earn about $14,500 per year gross salary ($29,000 for married couples) before deductions for social security and medicare, based on a 40 hour work week and 50 weeks worked per year). Current workers earning at or near this amount receive substantial “earned income” and “child tax credits”, which means that they pay NO income tax; the tax credits often total near $10,000 per couple, per year (and approach $6,000 for single parents). Although these “Credits” are reported on the tax return as a “Refund”, in fact this is free money given by the government to low wage workers. As a direct result of their “low wage” status, these workers are also eligible for food stamps, subsidized housing, SNAP Cash (free $300/mo cash), free healthcare, free or deeply discounted education costs and other benefits. By earning higher wages many will no longer qualify for substantial tax credits and other freebies. As well, many will likely owe a small amount of income tax.
6. Prices for goods and services will increase. Although a substantial minimum wage increase may result in increased consumer prices, it is unlikely that such an increase will be significant, as doing so will be perceived as “to risky” for most business owners – why panic and risk losing customers to competitors who do not increase their prices? Therefore, it is likely that the first move by most business owners will be to cut costs, and not to pass on the added wage expense to their customers.
Conclusion: Initially increasing minimum wage for unskilled workers will have significantly negative consequences for both workers and employers with little impact on consumer prices. However, potential loss of low-wage jobs, tax credits and other incentives for minimum wage workers, may act as a wakeup call for the unskilled work force, hopefully prompting an enrollment boost at vocational schools and colleges.
Should the impact of higher minimum wages reduce the number of available minimum wage job openings, unskilled workers seeking higher-level vocational training or a college degree, over the long term, should have a positive effect on the overall economy… but don’t count on it! Lazy is as lazy does! It is more likely that policy makers will adjust tax credits and other freebies so that, in the end, those who remain employed will enjoy no real increase or decrease in his or her standard of living. Of course, fewer minimum wage workers will most surely be employed.
Likely winners from increased minimum wages: technology innovators (startups), business strategists and the government.
Likely losers from increased minimum wages: many (but not all) low-wage and semi-skilled workers. Regardless, such a change will be a paradigm shift.