The One-Two Punch For Low-Pay Workers

Investor's Business Daily

All of the analysis supporting President Obama's proposed minimum-wage hike has been curiously silent about the Democrats' other big initiative for leveling inequality — ObamaCare.

That's a pretty big oversight because both efforts to lift up low-earners — via higher wages and health benefits — put the onus on low-wage employers.

By itself, the proposed 39% federal minimum-wage hike (from $7.25 to $10.10 an hour) far exceeds the sub-20% increases studied over the past two decades, with some finding little impact on job availability.

Add in the cost of complying with ObamaCare and it becomes clear that these simultaneous mandates on low-wage employers would be unprecedented.

This suggests that the studies cited to defend the White House minimum-wage plan shouldn't be relied upon for predicting how the labor market will respond.

The risk is that these new costs will fall on low-wage workers, not just their employers and customers, via shorter workweeks and the accelerated substitution of technology for labor.

A federal minimum-wage hike of $2.85 an hour pitched by the White House would come on top of ObamaCare penalties that could equal $2.37 an hour for full-time workers who tap the health exchange subsidies.

70% Labor Cost Hike

Compensation costs for a worker earning the $7.25 an hour minimum that holds in 30 states could jump as much as 70% (excluding social insurance taxes), then keep rising as the wage floor keeps pace with inflation and ObamaCare fines grow with average premiums.

Employers can sidestep the Affordable Care Act's insurance mandate for full-timers (those working at least 30-hour weeks) by shifting workers to part-time. A big minimum-wage increase would add pressure on employers to do just that, complicating the goal of reducing inequality.

With a $10.10 hourly minimum wage, full-timers would earn 175% of the individual poverty level in 2016, making many eligible for exchange tax credits (and exposing their employers to potential fines). Whether workers in larger households would be eligible for Medicaid would depend on family size and other income.

ObamaCare's employer penalties, now delayed to 2015, were initially set at $2,000 per full-time-equivalent worker for firms that don't offer coverage to full-timers. Firms that do offer coverage, even of the skimpy variety, can instead pay a less-exacting fine of $3,000 per full-time worker who receives exchange subsidies.

This penalty is nondeductible, so a $3,000 fine doesn't equal $3,000 in wages for profitable firms. For retailers facing a 39.2% federal and state tax rate, the fine would equal $4,930 in wages. For a 40-hour-per-week, year-round worker, that's $2.37 an hour.

Low-Wage Hours Weak

Some economists dismiss the idea that ObamaCare is leading employers to cut work hours, pointing out that the private-sector workweek has recovered back to about where it was before the recession.

But a closer look reveals a much different reality among low-wage earners. In July — just as the employer mandate was put on hold — the workweek among private industries where pay averages up to about $14.50 an hour for non-managers matched the record low of 27.4 hours seen at the depths of the recession in 2009.

In effect, the workweek decline in these low-wage sectors explains 170,000 of the 605,000 jobs they added in 2013 through November.

It's impossible to know how much is due to ObamaCare. But the shorter workweek in many of the same industries where anecdotes have piled up about employers cutting hours to evade the law's penalties suggests that its potential to depress work hours should be taken seriously.

To some extent, the combination of a higher minimum wage and ObamaCare's employer mandate may mean workers clock fewer hours without forfeiting pay. Those earning $7.25 an hour for 40 hours would earn almost exactly the same working 29 hours for $10.10 per hour.

Yet workers already earning $9 to $12 an hour who had hours cut could still suffer a substantial loss of income.

Another reason to doubt minimum-wage studies is that they do not look very far ahead, typically analyzing changes within a year. That may not be long enough to gauge whether the wage hikes spur employers to substitute technology for labor, such as via fast-food order kiosks like McDonald's is adopting in Europe.

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