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MN Minimum: Half a Cent per Buck

Raising the minimum wage has become a progressive rallying cry.  While President Obama’s call to raise it to $10.10 per hour throughout the US is a longshot, given the Republican House, many states have either raised their wage or are considering it.  Minnesota is contemplating raising our minimum wage to $9.50 per hour by 2016, possibly indexed to inflation afterwards, and it is likely to pass.

What is the net effect on the economy?  An analysis of the net effects was prepared in December and with a little more math it boils down to something no worse than 0.5% of the total economy of the state.  It’s a way of looking at the proposal that makes the case against raising the wage much more difficult, although the effects are not felt uniformly throughout Minnesota.


Is economic justice being served?

The reasons for raising the minimum wage are simple and powerful.  If the Federal minimum wage had kept pace with inflation since 1968, it would be $10.56 today.  Nationally, a solid quarter of all workers earning the Federal Minimum of $7.25 are receiving public assistance, according to a study by the Center for Labor Research at UC Berkeley last October – and over half of all fast food workers.  Those workers account for over $7B in net public costs every year.

Paying a “living wage” to people who work for a living is considered by many to be a central part of any valid social contract, let alone relief to the cost of the public assistance.

But this way of looking at the situation only highlights the perspective that a minimum wage is essentially a tax on employment.  It is a mandate that a certain amount must be paid, although money does not pass through the government but instead goes directly to the worker.  We can analyze the net affect of the Minnesota proposal this way.


What would Floyd Olson do?

The Minnesota Department of Employment and Economic Development (DEED) compiled an analysis of the number of workers who will be affected by the proposed increase last December.  These data came from extrapolating from unemployment filings in 2013.  Currently, the state has a two-tiered minimum of $5.25 per hour for small businesses and $6.15 for larger businesses.  Those only apply to companies not covered by the Federal wage, which is to say they do no interstate business.

The total number of employees affected by the proposed raise include:

  • 88k making between $5.25/hr and $6.15/hr.
  • 88k making between $6.15/hr and $7.25/hr.
  • 13k making exactly $7.25/hr
  • 360k making between $7.25/hr and the proposed $9.50/hr.

We can estimate the total cost as a “worst case scenario” by multiplying these wages out, with an average per category, into yearly earnings.  Many workers making minimum wages are not full-time, but if we assume 2080 hours per hear (40 hrs/wk * 52 wks/yr) maximum we can figure that raising them all up to $9.50 per hour will cost a total of $1.5B more per year.

In 2013, the total Gross State Product (GSP) for Minnesota was $308B.  That’s assuming the state is still growing at a robust 4.5% (as it has been for years) above the official $295B for 2012.  The net $1.5B per year in additional wages is just a bit less than 0.5% of GSP, or half a cent to every dollar spent in the economy.

The question before the legislature right now is this:  Is the social contract that work gives you a living wage worth half a cent of every dollar spent?

Small businesses have been hiring much more rapidly

Small businesses have been hiring much more rapidly

That cost will fall entirely on businesses, affecting smaller businesses more than most.  The same DEED study showed that fully 49% of minimum wage workers are in retail, including restaurants and stores.  Their share of the costs would be $932M, and compared to their $16.3B per year share of GSP in 2012 their total hit would be 5.7% in this worst-case scenario.  The cost of the minimum wage increase does not fall evenly through the economy by any means.

Meanwhile, the same legislature considering this minimum wage rise has in its hands a rosy budget projection with a $1.2B surplus.  $233M of that is being considered for business tax relief by repealing some ill-thought new taxes enacted just last year.  It’s not enough to offset the cost of a rising minimum wage, but it helps.

No matter what, considering the state’s proposed increase in the minimum wage as something like a tax on employment is a useful exercise.  The worst case cost of $1.5B can be compared to the $26.4B collected in taxes annually by state and local governments, or 8.9% of GSP.  It is not a small amount, but overall it is not a killer.  It’s worth it to get people off of public assistance and establish the contract that if you work you make enough to live.

10 thoughts on “MN Minimum: Half a Cent per Buck

  1. In looking at this way, as a tax, do the calculations also consider that this money going out in terms of higher wages also gets into the economy faster via worker spending, and part of it is also collected back in income taxes?

    • Not at all. I was looking at a purely worst case scenario, which is that in the case of our state it runs at most half a cent per buck in the state’s economy. That’s purely the cost, not the benefit.
      I am sure the benefits are large, but that will take another calculation which I don’t have at my disposal right now.

  2. $9.50 an hour is NOT a living wage! If this is a start towards getting there I will support it but there will still be working people collecting food stamps if this is as high as it goes.
    But your analysis is good and I for one am willing to pay half a percent more for things if it means that people don’t go hungry.
    What about the savings directly from the social safety net as well as the higher growth we can expect when there is more money in the hands of working people?

    • Fair enough, but we do have to start somewhere. What I am trying to do here is use something like a scientific method for politics – what is the worst that can happen? Think of it as the antithesis for the proposal. If this is as bad as it gets, how can you oppose it? But yes, we do need the benefits. I will work on that.

  3. If it effects all shops equally then everyone has to pay the same price no matter where they go so there is no difference. I wish people would realize this. The way you calculated it as .5% increase makes sense because that is what we might expect in inflation if everything rises. This is a total no brainer.

    • Thank you, a good way to look at it. 0.5% added to inflation we see today ~1.0% is still well below the target of 2.0% that the Fed has. I suspect the net affect is the same nationwide, too, but I can’t be sure.
      (BTW, when you write .5% most people can’t see the decimal – that’s why 0.5% looks so much better. 🙂 )

  4. It both is and is not a lot. It is a lot of money if you have to pay it out and it will be a lot to add to a restaurant bill. Makes the case for tipping less too.

  5. As always, great work. I really like your approach of assuming the worst and showing how even then the minimum wage hike makes sense.

    If you’re interested, I’ve argued that a wage subsidy (similar to the EITC but distributed through payrolls instead of tax refunds) would more elegantly accomplish the same goals as a higher minimum wage. http://caseyjaywork.wordpress.com/2014/01/09/a-15-min-wage-is-good-but-a-wage-subsidy-is-better/

    Speaking of tipping, I’ve also argued that tipping is just a contingent wage, and should be replaced by a higher legally-protected wage. http://caseyjaywork.wordpress.com/2014/02/04/foodservers-wages-arent-gratuitous/

    • Thanks, you do good work, too!
      The principle of a “negative income tax” as Friedman called it or any other guarantee that work makes a certain minimum is a very compelling one. The minimum wage functions essentially the same way, except it very much is a tax on employment. On that basis it is a bad idea, and I’ve argued in a lot of posts that we should not have taxes on employment, so you have a point. But the details utterly blow my mind, to be honest. 🙂
      I also agree on tipping, but this is the system we have. Some restaurants have moved to a higher base wage and discourage tipping, especially in New York, so there may be a trend there. But it is a social thing at this point. Again, I can’t disagree with you, but the details of moving away from the system we have are hard to grasp.
      There’s a lot more to write about, for sure! If only I had a paying job where I could consider this all day. 🙂
      Thank you for your contributions, I sill definitely follow you more closely and hope my readers do, too!

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