Updated: Aug 21, 2019
Setting a minimum wage doesn’t make everyone’s labor more valuable. It simply makes it illegal for lower-skill, less-experienced workers to be employed at all.
Many of us remember the anticipation and pride of opening our first paycheck, only to feel sick and indignant at that tiny after-tax total. We might feel salty toward that stingy grocery store or restaurant chain that couldn’t cough up more than minimum wage. The truth is, your employer pays far more to employ you than your hourly rate. Thanks to government-imposed burdens, your bosses could be paying twice as much to employ you as you’ll see in your take-home pay.
Presidential candidate Sen. Bernie Sanders was blasted from all sides in July after his staff’s complaints about their pay were leaked to The Washington Post. Sanders made the “Fight for $15” minimum wage cause a centerpiece of his campaign, but his lowest-tier employees reported salaries and long hours that amounted to less than $13 per hour.
Campaign field organizers, usually recent graduates seeking the prestige of a national candidate, generate relatively little value and are sometimes volunteers. Rather than boost salaries, Sanders initially suggested cutting staffers’ hours, upping their per-hour pay but cutting the valuable experience and face-time many had signed up for. The proposal was met with contempt from his supporters and sighs from economists who’d predicted that’s just what employers would do under Sanders’s proposed policies. Battered by the negative press, the campaign relented, goosing lower-tier salaries to $42,000. But at what cost?
Real Costs of Employment
It’s not hard to imagine a field organizer—let’s call him Leon—experiencing the same annoyance and resentment many of us felt opening those first paychecks. If Leon is paid $15 per hour to work full-time, he earns $31,200 per year. But under federal law, his employer also pays $1,934.40 in Social Security taxes and another $452.40 in Medicare taxes. Sometimes you’ll see these two items combined as “FICA” or the “Federal Insurance Contributions Act.” Your employer pays FICA taxes in addition to your wages and by law must withhold your individual share, as well; independent contractors pay both portions themselves. Federal unemployment and retraining taxes cost employers another $427.
Sanders’s campaign, like other employers, also has to pay health insurance premiums for employees—by far the fastest-growing portion of employee compensation—an average of $15,000 per employee per year. If Leon earns $15 per hour, taxes and top-down mandates mean he takes home about $12, but his employer pays $24.63 per hour for his labor. All told, Leon’s wage is $31,200, but the cost to employ him under federal law is $49,012. This does not include state and local taxes, unemployment insurance, uniforms, onboarding, and other employment costs.
But it’s unlikely that Leon actually works 2,080 hours a year. If, like most Americans, he took some paid time off—perhaps a few sick days, even a short vacation—he actually worked more like 1,990 hours.
If Leon earns $15 per hour, taxes and top-down mandates mean he takes home about $12, but his employer pays $24.63 per hour for his labor ($49,011.80/1,990).
If Leon and his employer had the flexibility to negotiate, they could easily create a much more equitable agreement for the value of Leon’s labor, but this is illegal. Instead, federal mandates limit their choices and enforce trade-offs to which neither of them agreed.
Minimum Wage Hikes Reduce Real Income
Setting a minimum wage doesn’t make everyone’s labor more valuable. It simply makes it illegal for lower-skill, less-experienced workers to be employed at all. By definition, the minimum wage permanently excludes some people from the workforce. Teenagers, the disabled, the recently incarcerated, and exactly the kind of low-experience, low-skill workers the minimum wage purports to protect will be priced out of the job market, trapped in poverty.
Fewer than 1 percent of total US workers make the federal minimum wage. That small but vulnerable population is statistically much more likely than the workforce in general to be under 20, lack a high school diploma, work part-time, and work in food preparation. If low-skilled labor gets suddenly more expensive, those employers will hire fewer low-skilled workers.
Workers just starting out will not be helped by making their labor more expensive to employers.
For presidential campaigns, which nearly always end in debt, $25 an hour may be feasible. But for the kind of businesses that employ most minimum wage workers (retailers, food service), profit margins are extremely thin. If low-skilled labor gets suddenly more expensive, those employers will hire fewer low-skilled workers. Maybe they’ll install more self-checkout stations or a burger-flipping robot. Maybe they’ll have to raise prices or cut hours to make up the margin.
The Congressional Budget Office released a report confirming that federal wage increases mean less real income for all affected families. At best, government has selected the winners and losers—but in fact, we are all losers.
Wage Flexibility and Full Employment
Denmark, like other Nordic countries, has no national minimum wage. Instead, minimum wages are negotiated voluntarily by each economic sector. As in the United States, only 1-2 percent of employees actually earn the minimum for their sector, and employment is fairly flexible. In spite of their reputation for a decadent social welfare scheme, pension accounts are private, rather than government-run, meaning your contributions are earmarked for you personally. Personal income taxes are very high (56 percent on average), but the added cost to employers is below 2 percent of wages.
A closer relationship between individual wage and cost-to-employer aids low-margin workers in getting the positions they need to gain skills and move up to higher tiers of employment.
With the cost of labor kept low, employment is steadily high. With the confidence that they’ll be able to fire an employee who turns out to be a bad investment, companies will “take a risk” to hire and train individuals who otherwise might be excluded from even interviewing. A much closer relationship between individual wage and cost-to-employer also aids low-margin workers in getting the positions they need to gain skills and move up to higher tiers of employment.
The instinct to help the least fortunate among us is a noble one, but hiking the minimum wage punishes exactly those Sen. Sanders hopes to help.