Liberal and conservative economists agree that a federal minimum wage increase to $15 per hour from the current $7.25 per hour rate would come with significant consequences. While a shift in the economy would immediately be impacted by such a mandate, many wonder if that shift would be a good one.
The Heritage Foundation’s James Sherk provides an in-depth analysis of this proposed legislation in a July 2016 Issue Brief. This article is a consolidation and reflective summary of Sherk’s Issue Brief, highlighting the three most startling concepts from his analysis.
1. Cost to Employers
While workers will see an increase in minimum starting wages to $15 per hour, the change looks quite pricier to employers. Based on averages for private-sector employment rates across the United States, $15 per hour looks more like $18.61 per hour based on the following government mandates (per hour):
- $15.00 minimum wage
- $2.27 Affordable Care Act (ACA) penalties
- $1.15 payroll taxes
- $0.19 unemployment insurance taxes
Per the ACA, most employers who fail to offer full-time employees qualifying healthcare coverage are required to pay a per employee penalty after the first 30 workers, if they employ 50 or more workers. Currently, the penalty is $2,160 per employee and should rise to around $2,886 by 2021-- $4,731 in pre-tax payroll costs.
2. Impact in Areas with Lower Costs of Living
Relative to the state with the highest cost of living (Hawaii), $15 per hour spends differently from state-to-state. While the increase in minimum wage may increase purchasing activity in states like Mississippi, Arkansas, or even Missouri, it is expected that it would require $20 per hour for workers in Hawaii to purchase comparable goods and services.
A primary motive for increasing the minimum wage was to make living more affordable. But the minimum wage mandate does not, and is not proposed, to account for regional differences in costs of living.
3. Eliminates Job Opportunities
Full-time employees would need to create at least $38,700 per year in value for their employers under a $15 per hour minimum wage increase. Consider that the proposed legislation does not distinguish a change in the minimum wage with respect to age, nor is it being suggested here that it should; but it is important to acknowledge that such an increase would make it exceptionally difficult for younger, less-experienced or less-skilled workers to find work.
Additionally, an estimated 27.4 percent of already-existing workers would have their wages affected by a minimum wage increase to $15 per hour. As discussed earlier, hiring costs would rise to $18.61 per hour, which businesses would respond to by, as Sherk explains, “eliminating positions, cutting hours, and looking for new ways to implement labor-saving technology.” Employers could be expected to reduce employment by approximately 19 percent, representing about 6.9 million fewer full-time employment opportunities by 2021.
Understandably, key Congressional figures would like to increase the minimum wage because they believe that it is in the best interests of the United Stations from a humanitarian standpoint. The three reasons described above embody an idea that we may want to further consider how such an increase might be counter-productive.
Further reading....
James Sherk, The Heritage Foundation: "Issue Brief, No. 4596"
John DiStaso, WMUR: "Minimum wage splits candidates along party lines"
Globotimes: "Impact of a Rise in Minimal Wage"
