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The Minimum Wage Increase: What to Expect and How to Deal with It

| December 20, 2019
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As of July 2019, the United States House of Representatives has passed a bill to increase the federal minimum wage to $15 an hour by 2025. This bill has not yet passed in the Senate, and while Republicans still maintain control of the Senate, I doubt it will pass. However, with today’s political climate it seems like anything can happen.

While there was celebration by many believing that this bill was and will continue to be a monumental success that will help many, they seem to be completely ignoring past data, history and the knowledge of industry experts. They also seem to be ignoring that the bill still needs to get through a Republican-controlled Senate.

The Bureau of Labor Statics (BLS) shows that only 2.2% of employees earn minimum wage or less. That estimate is based solely on the hourly wage workers report, which does not include overtime pay, tips, or commissions. The BLS also shows that the number of workers “earning” minimum wage or less has decreased every year since 2010 by an average of 13.2%. The BLS also shows that individuals holding more than one job has remained below 6.3% since 1994 and below 5% since 2010. We should also point out that the definition of a multiple job holder includes individuals like Bernie Sanders, Tucker Carlson, Rachel Maddow, and even the current President, who all have full-time jobs but are also “authors” and/or hold another job. The title is specific to anyone who has worked more than one job in a year and is not specific to income. I have not been able to find any data that does include income demographics with the title.

Since we’ve determined that the Raise the Wage Act (RWA) is absolutely necessary and the data collected is impeccable, let’s discuss where the resources to pay all these employees will come from. While many congressional supporters and authors of the RWA expect the increase in the minimum wage to be paid by that hypothetical bed of money and pool of gold coins all those greedy business owners have; recent regional data and past historical data shows that it won’t.

Before any readers start to think this is a politically motivated piece, or written with a political bias, don’t. I hate all politicians equally, and the information in this article/newsletter is not based on theory or opinion; it is based on facts, data, historical performance, and the knowledge of industry experts. I will admit that fiscally I lean conservative. However, I also know that the only time Republicans cry about the deficit and want to cut budgets is when there’s a Democrat in the White House. If you disagree with the data we used, you can check our sources at the end of this article.

According to the Employment Policy Institute:

  • 70% of labor economists believe an increase in the minimum wage has a negative impact on the labor market
  • Nearly 80% of labor economists believe that a 10% or higher increase in the minimum wage is detrimentally negative for the labor market
  • 84% believe that it will have a negative effect on youth employment
  • 6% of labor economists believe increasing the minimum wage is an effective way to help those living below the poverty line

The majority of labor economists (nearly 70%) believe that the best way to help those living below this poverty line is through tax credits, which the Tax Cuts and Jobs Act (TCJA) does by doubling the standard deduction. That paired with the Earned Income Tax credit substantially increases the amount of tax benefits available to low income earners. So, while an increase in the minimum wage may seem well intended, the experts believe that the outcome will not benefit those whom this increase intends to benefit.

So, what can we expect if the minimum wage increase does pass in the Senate? As consumers, when we review historical constants, we can expect an increase in the cost of goods and/or services to be proportionate to the increase expense added to produce said goods and services. It is very common for an increase in the cost of production to be passed on to the consumer.

It’s not uncommon to see a decrease in costs of said goods/services in some industries 2-5+ years after that initial increase in costs. However, the drop is normally associated with automation within those industries. Automation has made many products such as cars, computers and the Big Mac more affordable so the average American can purchase them. Automation does, however, normally replace entry level and unskilled labor. Therefore, the initial increase in costs will likely be followed by an increase in the unemployment rate, specific to entry level and unskilled labor. We have already seen this regionally throughout the U.S. in specific cities and states that have raised the minimum wage to $15 an hour.

The other constant that we can expect to see is a reduction in full-time employment and hours worked per week for employees who are paid hourly. A very large reduction in overtime pay is also consistent with an increase in the minimum wage. We have also seen this regionally through the U.S. in specific cites and states that have already raised the minimum wage to $15 an hour.

We can also expect to see, as we have for the past 2 decades, an increase in the independent contractor and 1099 labor market. I want to be clear that the increase in the 1099 labor market is strictly a personal theory and not based on historical data, but it would be a way for employers to cut back on costs such as payroll taxes and the necessity to offer benefits to be compliant. We’ve also seen an increase in the independent contractor/1099 labor market for the past two decades with around a quarter of the labor force already falling into that segment. Many labor economists expect this to increase to nearly half of the labor force within the next 10 years.

The good news is there are some potential solutions to cut back on costs without having to sacrifice employee benefits, service and/or quality of those benefits. Employers with 3 or more employees can utilize a Medical Cost Sharing Community (MCSC) to reduce healthcare premiums by up to 70%. Employers with 25 or more full time W2 employees could implement a Payroll Tax Reduction Plan to increase employee benefits, without a change in the net pay of their employees, and significantly reduce their payroll taxes. And businesses doing $4,000,000 or more in revenue could review their feasibility for a captive insurance model, which could potentially keep 80% of their insurance premiums in their pocket.

While we still are not sure if there will be an increase in the federal minimum wage, we do know that certain states such as New York have already increased their minimum wage. We can also confidently expect expenses such as healthcare and other employee benefits to increase as well. If you do think any of the above strategies can be a viable option for you, you can always reach out to me or my office here for a review.

 

Warmest regards,

Dan Nuwash

Founder and Managing Partner

Finance For Thought

www.FinanceForThought.com

 

 

Sources:

https://en.wikipedia.org/wiki/United_States_Senate

https://en.wikipedia.org/wiki/United_States_House_of_Representatives

https://www.epionline.org/release/new-survey-74-percent-of-economists-oppose-15-federal-minimum-wage/

https://www.epionline.org/oped/minimum-wage-hikes-a-poor-way-of-lifting-people-out-of-poverty/

https://www.bls.gov/opub/reports/minimum-wage/2017/home.htm

https://www.congress.gov/bill/116th-congress/house-bill/582/text

https://www.economicshelp.org/blog/11503/labour-markets/effect-of-minimum-wage-on-adas/

https://www.forbes.com/sites/jackkelly/2019/07/10/the-unintended-consequences-of-the-15-minimum-wage/#7be45c91e4a7

https://journals.sagepub.com/doi/pdf/10.1177/0019793917713735

https://www.bls.gov/opub/ted/2018/4-point-9-percent-of-workers-held-more-than-one-job-at-the-same-time-in-2017.htm?view_full

https://www.bls.gov/cps/lfcharacteristics.htm#mjh

https://en.wikipedia.org/wiki/Earned_income_tax_credit

https://www.thebalance.com/unemployment-rate-by-year-3305506

https://www.dol.gov/agencies/whd/minimum-wage/history/chart

 

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