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Minimum Wage Hike a $15 Billion Tax on Employers

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Minimum Wage Hike a $15 Billion Tax on Employers

April 21, 2014

On Thursday the nonpartisan Congressional Budget Office released a cost estimate for the Minimum Wage Fairness Act, which would raise the minimum wage. According to CBO’s estimate, raising the hourly minimum wage to $10.10 would increase private sector costs by $15 billion.

Essentially, a minimum wage hike is a $15 billion tax on businesses that employ low-wage workers. This would discourage the employment of such employees.  An unintended consequence of the bill is that the low-skill workers the bill’s sponsors are trying to help would be the ones most negatively affected.

The misnamed Minimum Wage Fairness Act, manifestly unfair to low-skill workers, was introduced by Senator Tom Harkin (D-Iowa) and co-sponsored by 34 Democrats. A similar House bill is sponsored by Rep. George Miller (D-California), again only with Democratic support. The bill would raise the minimum wage over the course of two and a half years, followed by an annual adjustment corresponding to the consumer price index—which is widely-regarded to overstate cost-of-living increases.

The CBO cost estimate follows its February 2014 report, which concluded that half a million workers are likely to lose their jobs if the minimum wage increased to $10.10 an hour. That report actually underestimates possible job losses, because CBO’s estimate of labor elasticity is a low -0.1. The net result of assuming that elasticity is that for any wage increase, CBO would find very few workers losing their jobs. Employers in CBO’s world would hire 96 percent of workers formerly making $7.25 an hour, even when their new wage rose to $10.10. Consumers would face higher prices, but they would not adjust spending down in a substantial manner.  This is unrealistic.

Even if the February 2014 report were accurate, it concluded that real income would only rise by $2 billion, which pales in comparison to the $15 billion taken out of the economy because of the Minimum Wage Fairness Act’s mandates.

According to CBO, the federal budget would be indirectly affected by “boosting the prices of some goods and services,” as well as “reductions in income for [some people].”

The resulting lower wages and higher prices do not just affect the federal government, but also the average American. The cost of everyday items would rise—especially those from industries supported by low-wage workers. Families already struggling to pay their grocery bills would be further harmed by lower wages, or even layoffs caused by a government-imposed cost increase to low-wage employment.

In addition to raising the minimum wage, the bill would increase the tipped minimum wage until it is 70 percent of the regular minimum wage. This is misguided because, with earnings from tips, tipped workers usually earn far more than $7.25 an hour. According to the Labor Department, waiters in Boston earn an average of $13.69 an hour and waiters in South Florida earn $10.14. If workers earn less than the federal minimum wage of $7.25 an hour, employers are required to make up the difference. This is one reason waiting jobs are highly desirable for young people.

If there is ever a time to increase burdens on business hiring, it is surely not now. Total nonfarm payroll job levels have still not reached their pre-recession peak, and labor force participation rates are equal to 1978  levels. Congress should take the recent findings by CBO seriously and abandon consideration of the destructive Minimum Wage Fairness Act before more damage is done to low-skill workers. 

 

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