Raising Minimum Wage Hurts the 99%

27 03 2016

There’s a tentative agreement in place to raise the CA Minimum Wage from $10/hr to $15/hr, a fifty percent (50%) increase in a wage that is intended to be the minimum amount an employer will pay for entry level or non-skilled services rendered. What will be the immediate and long term effect on consumers, small business and the overall state of the California economy?tax map

Minimum Wage Effect on California Business – First, let’s explore what the increase means to the employer. When an employer pays a full time employee, she pays out an hourly wage that has been burdened to include the costs of social security tax (FICA), Federal Unemployment Tax (FUTA), State Unemployment Tax, Medicare Tax, CA disability insurance, employer’s payroll tax, and the allocation of reserves for paid holidays, paid time off, state mandated paid sick and family leave. For this example, I am not including the costs of overhead that a company has to pay in order to provide its services; overhead costs can fluctuate quite a bit depending on the service or product the company provides. So, for an employee to be paid $15/hour, it actually costs the company approximately $19/hr just for the labor costs alone. Compare that to the company paying $10/hr a burdened hourly rate of $12.67/hr., also a 50% increase in labor costs. This means any labor-intensive business will experience a 50% increase in labor costs alone. However, the increased costs don’t stop there.                                                                                      If  this business is paying for services or materials from another CA business, it will pay inflated costs for those services and goods driven by the increased costs affecting the providing company. In order to remain an ongoing concern, these businesses will have to decide whether to cut labor, increase costs,  a combination of both, or cease to do business in     California. 

Real World Example – Let’s consider the example of a local home care agency. Our hypothetical client is Dorothy; she’s an 80 year old widow living on fixed income and social security in a modest home where she raised her children. She’s not able to get around without assistance, so she’s hired an agency to provide caregivers for 10 hrs a day, seven days a week. Based on current economics and market conditions, Dorothy will pay approximately $27/hr for these services – $8,127/month for the security to be happy and comfortable in her home. The agency pays its caregiver $13/hr for these services; however, the cost for the agency to provide this service is $16.47/hr for the caregiver, and an additional $8.00/hr for the cost of overhead, licensing, background checks, etc. The cost of service for the agency is $24.47/hr. The profit per hour for this client is $2.53, or $761.53/month. The point here is that the profit margins are very low. When the minimum wage is raised to $15/hr, this same caregiver will be paid no less than $18/hr. Dorothy will now pay $11,438 for the same level of service, a 41% increase! Do you suppose her income and social security will increase by 41%? This is just one example of how the cost of raising the minimum wage will be shouldered by those who can’t afford to carry the costs. 

How Can We Increase Buying Power? What remedy do we have to help those with limited skills increase their buying power through higher wages? union 1It’s not by a union-funded campaign to raise the minimum wage, wherein the unions stand to gain the most through higher membership dues driven by higher hourly wages. No, this has to be a sustainable solution.

No Pain, No Gain – The Solution will help lower unemployment, which will drive hourly wages up through the simple law of supply and demand. The solution revolves around controlling illegal immigration and imposing greater penalties for employing undocumented workers. Combine that with a reduction in government assistance for unemployed or underemployed; there is currently no incentive to take low wage jobs, as it’s easier to stay home and cash a welfare check, or other form of assistance than it is to work. I can hear the recourse now… 

“no white person is going to do the work that the undocumented workers will do for the wage paid to the illegal workers” 

That statement is largely true with today’s long list of entitlements. However, if that “white” unemployed person loses entitlements and has to work to put food on the family table, that worker will do the work the immigrants are currently doing at a fair market wage. Things are going to have to become uncomfortable before wages increase. 

Expensive Eggplant and Costly Carrots – My farmer friends tell me that they can’t afford to pay the legal workers a market wage; if they paid them a “legal” wage, the costs of produce would increase for everyone. Maybe so, but again, as the market conditions are allowed to take place naturally through supply and demand, there will eventually be more workers available due to the lack of government assistance, thereby willing to work for a wage they might not have taken when receiving government monies. European Migrant WorkerIt may mean that those wages might be a bit higher than those currently paid by that farmer in order to attract the legal workers. However, an equilibrium through supply and demand will be found and both wages and costs of produce will stabilize. If  our produce prices rise a bit for a period of time, isn’t that better than having the wages artificially inflated? 

Leaving California – California business that compete nationally are already at a disadvantage to business headquartered in most other states due to the higher taxes and the highly-regulated environment. Raising the minimum wage in CA to $15 will drive those CA companies that utilize non-skilled and entry level labor to neighboring western states. This exodus translates to a reduction of the tax base and a potential increase in unemployment with the combination of the loss of companies employing unskilled and entry level employees, and those companies that have no choice but to remain in the state having to reduce their labor force due to increased costs of labor so that they can compete nationally.  Leaving-California



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