January 25, 2007

Pretend you're the President. You're sitting around the Oval Office and you get news that the Congress is working on passing a bill for raising the minimum wage and that you can expect that it will reach your desk in the very near future.

But what will be the impact? Some workers, particularly those in the range of the proposed minimum wage increase, will have their pay go up substantially. On the other hand, some can expect to lose their jobs as a direct result of the increase, while others will not be able to work the same number of hours as they had previously as their employers work to control their suddenly increased cost of doing business. Meanwhile, even if no one loses their job or has their hours cut, their employers might opt to increase their prices to cover their suddenly increased cost of doing business.

It's all just a matter of how much, and now it's time to figure that out with some back of the envelope calculations.

You know the following:

• The current level of the federal minimum wage is \$5.15 per hour. The proposed increase will see it rise to \$7.25 per hour.

• Approximately 6,663,431 people earn wages or salaries paid at an hourly rate of \$7.25 or less, as estimated from your most recent data as of 2005. This represents 5.3% of the 125,612,000 members of the U.S. hourly workforce. If you choose to just take the 75,609,000 members of the U.S. workforce paid at hourly rates into account in your calculations, that percentage increases to 8.8%.

• Although more people than this will be affected by the increase in the minimum wage (especially those who currently earn just above the proposed level), not all will be affected equally. We'll assume that this will be a good number to use for getting a rough estimate of the impact of a minimum wage increase. Likewise, the increased cost to employers will go up by more than what the employee will see in their paycheck (via the employer portion of FICA payroll taxes, etc.), but this will be left out of the calculations to keep them simple.

• Over the past 25 years, the typical U.S. corporation's total employee compensation costs averaged roughly 64.7% of its revenue while non-labor costs account for 23.4% of revenue. Profits are 12.0% before taxes and are 7.4% after taxes. (Values determined using annual data between 1980 and 2005 from the Bureau of Economic Analysis).

And now you're ready to run some numbers:

Minimum Wage Data
Input Data Values
Current Minimum Wage per Hour
Proposed Minimum Wage per Hour
Business Cost and Profit Margin Data
Input Data Values
Percentage of Revenues for Total Employee Compensation Expenses (%)
Percentage of Employees Affected by Minimum Wage Change (%)

Minimum Wage Driven Changes
Change in Income for Workers Values
Percentage Change in the Minimum Wage (%)
Change in Costs for Business Values
Business Profit Margin After Minimum Wage Change (%)
Percentage Change in Total Costs for Businesses (%)

The Pros and the Cons

The Pros: As you expected, the biggest winners will those who will continue working in their minimum wage job following the increase, also assuming their hours for working will not be cut. These individuals can expect to benefit from a nearly 41% increase in their pay before taxes. In 2005, there were 479,000 individuals who were paid the minimum wage level of \$5.15, and an additional 1,403,000 individuals who were effectively paid at rates below the federal minimum wage.

Likewise, approximately 4.8 million people who earn between \$5.15 per hour and \$7.25 per hour will benefit, although to an increasingly lesser degree. Those earning above the proposed minimum wage level may also benefit if their pay is indexed to the federal minimum wage.

The Cons: Here, the key number in the results is the Percentage Change in Total Costs for Business. This percentage represents the total amount of one or some combination of the following assuming businesses act to control their costs or to maintain their pre-tax profit level:

1. The average percentage by which the workforce will be reduced (layoffs).
2. The average percentage by which the hours available to be worked will decline (reduced hours).
3. The average percentage by which prices will increase (inflation).

More than likely, some combination of the three will occur. Unless there's some almost magical technological innovation or better way of doing things than can take the bite out of such a hike in the minimum wage through substantially higher levels of productivity.

Alternatively, business owners and shareholders might accept lower profit margins, but that might negatively affect things like investment returns and the ability of businesses to borrow money. And if prices rise substantially, will the Federal Reserve act to raise interest rates to keep inflationary pressures under control, increasing the probability of recession? Definitely not good for economic growth.

Then again, not all businesses hire substantial numbers of low-wage workers or have low-profit margins. But those that do, such as restaurants, which typically operate with a 4 to 7% profit margin and hire more than 1 of every 7 minimum wage workers, will be disproportionately affected.

So if you were the President, what would you do?

Previously on Political Calculations

Jobs and the Minimum Wage
Our short look at who really benefits and who really hurts when minimum wage levels are set.
The Disappearing Minimum Wage Worker
Back in 1980, roughly 8.9% of the total U.S. workforce earned the minimum wage or less. Today, that figure is 1.5% of the total U.S. workforce. The minimum wage worker is a vanishing breed!
The Minimum Wage and Small Business
What if you were a small business owner whose employees include a good percentage of minimum wage workers? What would a change in the minimum wage mean for your business?
Estimating the Distribution of U.S. Hourly Wage Earners
Have you ever wondered how many people earn a particular hourly wage in the United States? Or how many people there are between two hourly wages? Our tool estimates the answer!
Data for the Slaves of Wages
How many U.S. workers work full time vs part time? What about minimum wage earners? And what's the age distribution of minimum wage workers anyway?
Low End Income Inequality in the U.S.
We all hear that growing income inequality is bad, but we never hear that it's even happening for the lowest 20% of income earners in the US!
The 10 Jobs That Pay the Least
What are the occupations of the lowest paid people in the U.S.? And how much do they make? We here at Political Calculations not only ask questions like these, we take time out of our busy days to answer them too!

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