Today Seattle made the economically insane move to increase the minimum wage to $15 per hour, which is more than double the Federal minimum of $7.25 per hour. Other cities and states have also added to wage and price inflation and unemployment rates by doing their own increases in varying amounts. Obviously, I am not a fan. It is bad business, bad economics, and bad for people’s freedom of contract and ability to act like big people capable of making their own choices.
The economic implications of raising the cost of labor is obvious to anyone who has taken more than one semester of economics in college, and should be obvious to politicians. Like all things that are artificially inflated in cost by government regulation, labor will be pushed to the black market. More people will become independent contractors or unemployed and doing things under the table. Prices will go up at places like restaurants or on “Made In America” products, which makes everyone poorer. But the government gets more tax money and they get to say they are for the “common man” and ending suffering of the poor and underpaid, even though that is not true.
But setting aside all that commentary, changing wage minimums creates a financial nightmare for employers just from a logistical standpoint. Wage rates affect dozens of financial, tax and employment law functions that every business owner needs to be aware of. For example:
- The cost of unskilled labor increases
- The cost of overtime and mandatory double time increases (overtime must be 1.5 times the regular rate of pay), which impacts industries such as caretakers/nannies and health care particularly hard
- The cost of interns increase (no unpaid interns, remember)
- The risk of new hires increases because you will be spending more to see if someone is any good
- It flattens wages among the work force, preventing promotions, goals and proper stratification of your employee hierarchy, which can lead to low morale
- Salaries increase because, in order for exemptions to apply, employees must make a multiple of the minimum wage
- Payroll taxes increase across the board for both the employer and employee, and there are half a dozen of these taxes
- Employee tax brackets increase, meaning that employers have to become more vigilant of W4 abuses and unreported tips to avoid huge tax audits
- Worker’s compensation insurance premiums increase because they are based on total payroll amounts
- Fringe benefits become unaffordable, which means less tax breaks for both employers and employees
- Commission plans become unworkable because they are based on minimum wages
- Penalties for wage violations — even if accidental — increase because they are based on hourly rates
- 401k plans may have to be restated, as those are set up based on total salary mixes, particularly for small businesses
- Vacation and PTO plans represent huge liabilities that will prevent acquisitions of businesses and may force more businesses to close when the owner is unable to continue working
- Employers will be required to raise prices to cover higher overhead, particularly in service industry, or to replace their workforce with machines or outsourced labor
- Payroll processing costs increase because they are often based on a percentage of the business’s payroll
- Tipping may become discouraged or disallowed as that adds to an already high wage and increases taxes and all the above costs for the employer
- Lawsuits for alleged employment violations become richer and more dangerous (even if frivolous and for nuisance value) and may encourage an increase in litigation for both wage and wrongful termination claims
- The marginal cost of certain labor activities (donning and doffing equipment, for example) and rest breaks (which are paid) become higher, and with the squeeze on cash, hurt all the more for any employer who needs to increase productivity of its workforce to make up for the increased cost
- Increases in independent contractors mean more paperwork chaos, audits, tax penalties and prosecution risks
Employers are already hurting because of increased regulations and the Affordable Care Act. Unfortunately, the financial, legal and operational impact of such a dramatic wage increase is going to be felt strongly in Seattle, and in any other place crazy enough to try it.