If you were one of the business owners or HR managers that groaned when the minimum wage increased to $7.25 per hour, you’re not alone. However, cost of living levels demanded this increase leaving many wondering what are the effects of raising the minimum wage? Jean Scheid takes a look.
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Wages Up, Taxes Up
In July of 2009, the Fair Labor Standards Act (FLSA) set forth the new minimum wage at $7.25 per hour. One of the effects of raising minimum wage is the additional taxes employers ensue. Because employers must match social security (6.2%) and Medicare tax (1.45%) withholdings, these additional expenses to the business owner came with some negativity.
In addition to employer matched taxes, higher wages to the employee usually meant more federal, state, and local taxes paid by the employee, keeping HR managers office full of inquiries such as “what’s the point of making more, my taxes are higher!"
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Is It a Living Wage?
Employees don’t consider the payroll expenses of their employers—in fact, most probably are unaware of the tax-matching. However, proponents to the increase in minimum wages often say that $7.25 per hour is not a “living wage."
One of the effects of raising minimum wage is it appears not to cover the cost of living. For example, a person making $7.25 per hour with no overtime that is paid bi-weekly will receive gross wages of $580 per paycheck. If you count the social security and Medicare taxes taken out ($35.96 and $8.41, respectively), adjusted wages fall to $535.63 and that’s not including deductions for state, federal or local taxes. It also doesn’t include deductions for any employee portion of healthcare premiums or retirement funds.
Average monthly rents alone (for a one-bedroom apartment) can range from $400 to $800, depending upon location, so that pretty much wipes out an employee’s net wages making a two-income household or roommate necessary to cover living expenses such as food and utilities.
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Wages Up, Unemployment Up?
In a study performed by the University of Vermont to determine if the effects of raising minimum wage would increase unemployment levels, surprisingly, unemployment levels were lowered in both Pennsylvania and New Jersey. To be fair, however, most of the states compared in this study looked at the fast-food industry only.
In my opinion, the Federal minimum wage of $7.25 per hour is not a “living wage." Over the course of my life, I have been both an employee and employer and as an employee, everyone wants a higher wage, no matter what they’re making.
As an employer, I have always offered an initial wage of at least $8.50 per hour that increases if an employee finishes his or her orientation period of 3 months to $9.00 per hour. This is a positive effect of raising minimum wage, as it boosts employee morale and new employees understand that an annual performance review may increase their wage level even more, although it’s not guaranteed.
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Dig In & Be Prepared
HR managers and employers must realize that if they had to live on $7.25 per hour it would be extremely difficult. With more and more employers denying overtime that is paid at time and a half, it’s hard for the employee to make extra income by holding down only one job.
There are many negative effects of not raising minimum wage including employee pride, dissension, fear, and hopelessness. The positive effects do seem to make employees more dedicated, happy, and better prepared to pay their living expenses.
As the cost of living rises, the decision to increase minimum wage levels must be considered if employers want good employees. It’s best to stop groaning, pay a fair wage, and have a happy and content workforce. If not, you could find yourself appealing many unemployment claims because employees often quit due to low wages and can still reap the benefits of unemployment benefits in some states, even if they were terminated.
What are the effects of raising minimum wages? Think of higher wages as a positive and dig in and be prepared for the extra expense. Consider offering a higher entry-level wage. Happy employees can mean lifelong employees and missing this issue could cost you a lot more than wages and matched-taxes paid out.
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The Effects of Increase in the Minimum Wage - David Card and Alan Krueger – University of Vermont (accessed 10/17/10) - http://www.uvm.edu/~vlrs/doc/min_wage.htm