In last month’s edition of TrendLine (March 2014), we promised you an in-depth analysis of the minimum wage increase for federal contract workers. In this article, we delve into the impact that the wage increment will have at each option ($10.10 per hour and $9.00 per hour) on employment and family income.
A Background on the Wage Increase
On February 12th, 2014, U.S. President Barack Obama signed an executive order to increase minimum wages for federal contract workers to $10.10 per hour starting in 2015. The President also urged employers nationwide to increase wages for their workers.
A report by the nonpartisan Congressional Budget Office (CBO) says the federal minimum wage would cause the loss of approximately 500,000 jobs but would boost earnings for about 16.5 million low-wage workers.
The CBO further examined the effects of two options for increasing the federal wage:
$10.10 Option: This would increase the federal minimum wage from the current rate of $7.25 per hour in three steps – in 2014, 2015, and 2016. After reaching $10.10 in 2016, the minimum wage would be adjusted annually for inflation.
$9.00 Option: This option would increase the federal minimum wage from the current rate to $9.00 per hour in two steps – in 2015 and 2016. After reaching $9.00 in 2016, the minimum wage would not be adjusted for inflation.
The $10.10 Option
The $10.10 option would have a considerably greater effect on employment and income, as more workers would see their wages rise, and the change in their wages would be greater. At the $10.10 option, The CBO estimates that we will see a loss in employment by 500,000 workers. In terms of income, the increased earnings for low-wage workers under the $10.10 option would total $31 billion.
However, since many low-wage workers are not members of low-income families, only 19 percent of this $31 billion would contribute to families with earnings below the poverty threshold, while, at the top, 29 percent would go to families earning more than three times the poverty threshold. Additionally, some workers will become jobless as businesses cut costs to accommodate the minimum wage increase. Taking into account the increases and decreases in income for all workers, overall real income would increase by $2 billion.
For families below the poverty threshold under current law, real income would increase by a net of $5 billion, boosting average family income by 3 percent, and moving 900,000 people above the poverty threshold.
The $9.00 Option
At the $9.00 option, the CBO estimates that there will be a loss of employment by 100,000 workers. As far as income, the increased earnings for low-wage workers would total $9 billion.
Of this $9 billion, 22 percent would contribute to families with income below the poverty threshold, whereas 33 percent would accrue to families earning more than three times the poverty threshold. Considering the increases and decreases in income for all workers, overall real income would grow by $1 billion. Real income for families whose incomes are below the poverty threshold would increase by a net of $1 billion, boosting average family income by about 1 percent and moving 300,000 people above the poverty threshold.
Impact on Poverty Threshold
Impact on Federal Budget
At either option, besides affecting employment and family income, increasing the federal minimum wage would have an impact on the federal budget directly by increasing the wages that the federal government pays to hourly workers, and indirectly due to increasing prices on some goods and services purchased by the government. Most of these costs would be covered by discretionary appropriations.
Indirectly, federal spending and taxes would be impacted as workers with increased earnings pay more in taxes and receive less in federal benefits. However, people who become unemployed due to minimum wage increases will see a reduction in real income and pay less in taxes and receive more federal benefits. The CBO concludes that the net effect will probably be a small decrease in budget deficits for several years, but a small increase in budget deficits after that. Long-term impact of the federal wage increase is uncertain.
An Example: Impact of Wage Increase on Employers
With the White House urging employers to increase minimum wages for their workers, it becomes important to evaluate the impact of the wage increase on small employers. Additionally, employers will also have to contend with the costs associated with insuring their full-time workforce, under the ACA regulations coming into effect.
Let’s look at a quick example to examine the impact of the $10.10 option:
Company A has 100 employees; all working at minimum wage. Each employee works 8 hours per day. There are 22 working days in the month. The current hourly rate is $7.25. The proposed hourly rate is $10.10. The incremental change ($10.10 - $7.25) is $2.85.
Considering that the increment takes place in three steps, we assume that the $2.85 is separated as $1 in 2014, $1 in 2015, and $.85 in 2016.
The table below shows the extra wages paid by employer due to the wage increment each year.
Wages Paid Now
Extra Wages Paid by Employer After Wage Increment in 2014
Extra Wages Paid by Employer After Wage Increment in 2015
Extra Wages Paid by Employer After Wage Increment in 2016
Over the course of three years, Employer A would pay $102,960 more in minimum wages than current, with no changes to staff or hours or days worked. And every year after 2016, the employer would pay over $50,000 extra as the minimum wage is subsequently adjusted for inflation per the Consumer Price Index. Additionally, that since employer contribution to employment taxes are based on a percentage of income, employers will also incur additional costs on top of actual wage paid.
“Raising the minimum wage increases that demand, in CBO’s assessment, because the families that experience increases in income tend to raise their consumption more than the families that experience decreases in income tend to reduce their consumption. In the short term, that increase in demand raises the nation’s output and income slightly.” ~Congressional Budget Office