Uexpectedly! Seattle’s Minimum Wage Hike Hurts Workers

It is a given that an increase in minimum wage will decrease available jobs (via outsourcing, automation, reduction in the workforce and loading up the remaining workers, and reduced hiring by new businesses), it also hurts the current workers.  Consider the situation in Seattle, wherein workers who clean hotels are losing a lot of valuable perks (e.g. free parking, food on the job, a 401(k), and health insurance).  They also have had their overtime hours cut.

Most of the listed perks are given tax-free or tax-deferred, which is hugely advantageous for the employee.  It’s much better to be paid $10 and hour and get free parking and food than it is to be paid $15/hour, but have to pay $5/hour in parking and food: the latter are bought with post-tax dollars.  As an example, let’s assume that a person has a tax rate of approximately 20%.  In the former situation, the employee earns $10, pays $2 in taxes, and receives $5 in benefits, for a total tax bill of $2 and post-parking, post-food pay of $8.  In the latter situation, the person earns $15, pays $3 in taxes, and then pays $5 for parking and food, with a total take-home pay of $7. Multiply that by the usual 2,000 hours per year that a person works, and you can see that this change costs working-class people thousands of dollars a year.  Of course, this doesn’t even account for the effects of the marginal tax rate, but that only makes life worse for our employees. (I doubt that the government is shedding many tears over having more tax revenue.)

Similar logic applies to tax-deferred 401(k) accounts and tax-free benefits like health insurance.  The minimum wage hike forces low-skilled employees to take all of their compensation in the form of taxable income, rather than a mix of taxable income and untaxed or tax-deferred benefits. I know that your eyes are glazing over and you’re thinking that most low-skilled workers don’t care, but that does not change the fact that people will notice if they have less money left at the end of the year than they did the previous year.

 

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