The True Impact of the Minimum Wage on the Economy.

 

The True Impact of the Minimum Wage on the Economy

 

            You will never hear this from the liberal left because generally, they refuse to accept facts that do not fit their ideas or attitudes, but the truth is, you cannot argue with the facts and these are the facts. The minimum wage does not help the poor or middle class as the liberal left contends. It simply is not true. It does not increase their buying power or provide for an increased standard of living. As a matter of fact, it does the exact opposite. It causes a severe decrease in the buying power of the poor and middle class as well as a definite and substantial decrease in their standard of living. We can see the evidence every day in the declining affluence of the middle class in this country which started the very minute the Minimum Wage law went into effect.

 

            First implemented in 1938 by President Roosevelt (FDR), intending to “fix” something that was not even broken, for the stated purpose of ensuring that all workers, of all skill levels, could “earn a decent living” off their working wages. A very noble, if not somewhat naive sentiment (actually, it is a completely absurd and ineffective concept) meant to correct what is simply a natural, normal function of a capitalistic free-market economy.

 

            Implementation or increases of the minimum wage artificially inflates the overall wage scale, increasing costs to businesses and consumers in an inflationary way. In a free-market economy, such as ours (at least it is supposed to be), wages are a function of that market and controlled by factors inherent to that market such as the type of economy, population, level of skills and/or education of the workforce, supply & demand for goods & services, etc. Wages are driven by market conditions which are, or at least should be, unencumbered by gross legislative overreach and iron-fisted legal constraints.

 

            Increasing the minimum wage for low income wage earners cause the employers of those workers to have to increase prices of their goods & services to cover those increased payroll costs. Why do you think so many jobs have left the US? Because of the increased costs to the employee and employer are not in the form of a one-dollar employee pay increase to one-dollar employer payroll increase ratio. The increase in pay results in an additional increase to the employer above the salary increase in the form of higher government-mandated payroll taxes and higher benefits expenses and the employee experience a cost of living increase that is in excess of their wage increase. Therefore, the increased cost to the employer is more than just the increase of the wage, and the increased cost of goods & services experienced by the employee are not covered by the employee’s minimum wage rate and/or hike.

 

            Also, now that the prices have increased for the cost of those goods & services rendered to the buying public, customers (other persons and businesses) that utilize those goods & services, those customers/businesses have increased expenses themselves as a result of the higher prices and they too will increase their prices as well, but here again, this is not a dollar-for-dollar increase because of increased taxes and other metrics. This situation also gives justification to tradesmen and professionals to increase their salaries to make up for their diminished buying power due to the increased cost of goods and services. This means an overall increase in expenses & costs across the entire economy. So even high wage earners experience a negative impact in their buying power and standard of living due to increases in the cost of living that has now rippled through the entire economic spectrum. And they will compensate for that with increases in their wages and/or salaries.

 

            This wage increase also raises the employee into a higher tax bracket, so that they are now paying a higher percentage of their wages to the government in the form of their government mandated employee tax contributions and higher sales taxes (due to increased costs of goods & services). This is a great deal for the government but not so much so for the employee, the employer, or consumers in general.

 

            A $0.25/hr. increase in the minimum wage will result in an increase of only $10.00/wk. in the gross pay for a full-time employee. If we apply the employee portion payroll deductions (Federal Tax – 10.0%, Social Security – 4.2%, Medicare (FICA) – 1.45%) to this, we see that the minimum wage earners take-home pay went up by only $8.44/wk./$0.25 increase in the wage. Now, remember, that is for every quarter dollar increase in the minimum wage. In other words, if you increase the minimum wage by $1.00 then the take-home pay of the low-income wage earner increases by only $33.76/wk. However, the overall impact on the economy in general, and the low-income wage earner in specific is far more profound.

Here is why.

 

            Let us look at the employer’s side of this issue. Suppose the employer is now paying an additional $3.25/hr. to each worker in their employ and with that additional pay the employer is also required to cover any increase in their government-mandated payroll taxes as well (see table below). It looks something like this: Social Security TAX (6.2%), Medicare TAX (1.45%), Federal Unemployment TAX (FUTA) (6.0%). Now, remember these are taxes paid by an employer and are not deducted from the employee’s pay. These are DIRECT BUSINESS TAXES ONLY PAID BY THE BUSINESS. The same would also apply to state taxes as well. For example, State Unemployment Taxes and Workman’s Compensation are calculated based on gross payroll, the greater the payroll – the more the business pays in State Unemployment Taxes & Worker’s Compensation rates, so the employer would experience additional expenditures from these as well. Anyone who believes that a business (any business) can or will just absorb these increases in expenses really does not understand how business and the economy work. It is completely naive to think that the impact on businesses or the economy is negligible or insignificant or even positive in any way, shape, or form. Look at it like this, if you break down the numbers to a more manageable form it becomes truly clear what is happening.

 

            So, let us compare the employer ends of this issue side-by-side.

Table 1 - Standard 40-hour workweek pay checks.

Before Minimum Wage Increase (MW = $7.25) ($ 290.00/wk gross)				After Minimum Wage Increase (MW=$10.50) ($ 420.00/wk gross)
FICA (6.2%)	Medicare (1.45%)	FUTA (6.0%)		FICA (6.2%)	Medicare (1.45%)		FUTA (6.0%)
$ 17.98	$ 4.21	$ 17.40		$ 26.04	$ 6.09	$ 25.20
				+ $ 8.06	+ $ 1.88	+ $ 7.80
	TOTAL	$ 39.59			TOTAL	$ 57.33
						+ $ 17.74
		That is a 45% increase in the employer’s Federal payroll tax burden/employee.
	SUT (0.01 %)[1]	ST. WC ($ 5.06/$ 100.00 in payroll)[2]			SUT  2.75%)[3]	ST. WC ($ 5.06/$ 100.00 in payroll)
	$ 2.90	$ 14.67			$ 11.55	$ 21.25
					+ $8.65	+ $ 6.58
	TOTAL	$ 17.57			TOTAL	$ 32.80
						+$ 15.23
		That is an 87% increase in the employer’s State payroll tax burden/employee.
	INCREASE	IN SALARY		IN FEDERAL TAXES	IN STATE TAXES
INCREASE	TO EMPLOYER	$ 130.00		$ 17.74	$ 32.80	$180.54
		That is a 52% overall increase in the employer’s payroll burden/employee.

 

 

GOVERNMENT MANDATED PAYROLL TAXES PAID BY BUSINESSES ONLY

FICA – Social Security Tax

Medicare – Additional Social Security Tax

FUTA – Federal Unemployment Tax

SUT – State Unemployment Tax

ST. WC – State Workman Compensation Insurance

 

            As you can clearly see from the table above, this is NOT an insignificant burden placed on the employer and they certainly could not afford to just ignore it or absorb such a massive increase in their business operating expenses. This kind of expansion of expenses to employers will undoubtedly result in huge increases in the cost of goods and services to consumers (including those receiving the payroll increases) that will completely erode and exceed those worker’s gains in take-home pay. It should also be noted that there is not and could never be a situation where the increase in wages would be sufficient to overcome the increases in the cost of living…it is impossible. The numbers are impossible to argue with – these are facts, not opinions or high-brow idealistic mumbo-jumbo, just stone-cold hard facts.

 

FORBES magazine stated in an article dated 10/25/2018: “The nature of business is synonymous with risk.” Owning and/or running, or investing in a business is a risky endeavor, especially considering that over 50% of all new businesses fail within their first five years of opening. Businesses & business owners, as-well-as, stockholders & investors expect to make a profit, and rightfully so, otherwise why bother or take the risk? Therefore, the business will just pass on any increased costs to the market (“the market” means the consumer – for anybody who did not already know what that meant).

 

Absolutely, the government supports this kind of economic policy because the government is really the only true benefactor from this strategy. It moves both workers and businesses up into higher tax brackets or higher tax obligations, increasing workers' and businesses' tax burden. This means increased revenue for all government entities from the local level up to the federal level. From increased sales tax to local and state governments resulting from the increases in the cost of goods and services, as-well-as increases in state payroll taxes as the table above indicates, increases in the federal income taxes every working American pays, yes governments on all levels whole-heartedly support this policy and there is no reason why they would not (except, of course, for those individuals who understand and support what constitutes sound economic doctrine) and they possess the courage to follow that doctrine.

 

So, let us compare the employee ends of this issue side-by-side.

Table 2 - Standard 40-hour workweek pay checks.

Before Minimum Wage Increase (MW = $7.25) ($ 290.00/wk gross)				After Minimum Wage Increase (MW=$10.50) ($ 420.00/wk gross)
Federal Tax (10.0%)	FICA (4.2%)	Medicare (1.45%)		Federal Tax (10.0%)	FICA (4.2%)		Medicare (1.45%)
$ 29.00	$ 12.18	$ 4.21		$ 42.00	$ 17.64	$ 6.09
				+ $ 13.00	+ $ 5.46	+ $ 1.88
	TOTAL	$ 45.39			TOTAL	$ 65.73
						+ $ 20.34
		This is a 45% increase in the employee’s Federal payroll tax burden.
	State Tax (5.0 %)[4]				State Tax (5.0%)[5]
	$ 14.50				$ 21.00
					+ $ 6.50
	TOTAL	$ 14.50			TOTAL
						+$ 6.50
		This is a 45% increase in the employee’s State payroll tax burden.
	INCREASE	IN SALARY		IN FEDERAL TAXES	IN STATE TAXES
INCREASE	TO EMPLOYEE	$ 130.00		$ 20.34	$ 6.50	$103.16
		This is a 45% overall increase in the employee’s take-home pay.

 

 

Looking at the employee side of this equation is a little bit more complicated. The effects are far more diverse and far less defined. For example, it is difficult to gauge or measure the full impact the payroll cost increases will have on any and every business. Therefore, it is going to be harder to quantify this factor, profit margins are not typical across all industries.

 

However, as is evidently clear from a comparison of the two tables above, as table one, shows a 52% increase seen by businesses as a result of the mandated minimum wage increase and if only that increase alone were passed on directly to the consumer (which is rarely the case because by the time the mandated wage increase effects ripple completely through the economy it will show even more increases in the wage structure and cost to consumers) and if as seen in table two, the workers' take-home pay increase was only 45%, you do not have to be a mathematical wizard to see the negative 7% difference, which equates to a definite decrease in buying power that this situation has created. The result experienced by low-income workers and businesses is an artificial expansion of the economy and an overall significantly decreased standard of living (especially in the poor & middle-class communities).

 

Wages are a function of the market! When the government or labor unions artificially tamper with those market factors such are wages & benefits, they are damaging the economy not helping workers. The only way the government can better the situation of the common working under class is to better the business environment through increased competition, lower corporate tax rates, decreased government regulation & over-site, ease trade restrictions create policies that give individuals greater access to financial resources, lowering government spending (decreasing both the number & size of government programs & personnel) and implementing more incentives & protection, lowering the cost for innovation.

 

And the best thing labor unions can do is support their members by offering more opportunities for advanced education, training, & skills improvement, along with promoting an entrepreneurial attitude among its members to help them become business owners too, as-well-as monitoring and reporting safety & health issues of concern to their members, and working with (not against) local, state, & federal governments to do those thing listed above that actually, improve their member’s economic wellbeing.

 

Implementing or raising the minimum wage is a horrible idea - as proven above. A MINIMUM WAGE DOES NOT BETTER THE PLIGHT OF THE POOR OR LOW WAGE WORKING CLASS. PERIOD, NO MATTER HOW YOU WRAP OR PACKAGE IT. Having a minimum wage is the worst idea to address the problem of low working-class wages ever conceived.

 

Now I am not an economist, but you do not have to be one to understand how the economy and business work. All I have presented here is simple common-sense ideas & concepts and FACTS, and anybody who tries to say otherwise is simply ignorant or has some other (and most probably devious and self-serving) agenda.

 

Too many people today do not understand the way our economy works or the functions of government or of any other institution of society, for that matter, unfortunately, our school systems are only exacerbating the problem by refusing to teach civics in high school. But I will leave that discussion regarding our failed education system for another time, and guess what? It has nothing to do with funding either! What a surprise, huh? I will just leave it at that for the moment.

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[1] Because this tax is calculated on a per payroll basis the lowest rate (for the State of Oklahoma) was used to calculate this figure.

[2] Because this tax is considered and structured as insurance, the rate used was an average of all the classification codes and then an average of those two low & high rate calculations (for the State of Oklahoma)

[3] Because this tax is calculated on a per payroll basis & there was an increase in the total payroll the highest rate was used to calculate this figure (again, for the State of Oklahoma).

[4] This tax is calculated on a single/no dependent rate the highest rate (for the State of Oklahoma) because those are the workers most likely to be working at minimum wage positions.

[5] This tax is calculated on a single/no dependent rate the highest rate (for the State of Oklahoma) because those are the workers most likely to be working at a minimum wage positions.