What’s the Real Cost of Minimum Wage?

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The federal minimum wage has been set at $7.25 per hour since 2009.  However, movements for higher minimum wages are taking place in many states and localities. In 2017, and 18 states have raised their minimum wage with Oregon, Maryland, and Washington D.C. in place to increase in July. At the city level, cities such as San Francisco and L.A. are scheduled to achieve a $15 minimum wage in the next few years.

Social groups and politicians advocating for an increase in wage believe that it will help bring family incomes above the poverty line, remove the threat of homelessness for workers, and provide affordability of basic needs such as insurance, childcare, and healthcare.

As we look at what improved wages mean for hourly workers, it’s important to also understand what an increased minimum wage means for employers and how to adapt to these changes.


A raise in wage has an effect on another group of costs, known as a  “burden”  which can be about 28% in addition to payroll. (Use this formula to help calculate your employee burden based upon your location.)

Let’s take a look at some of these additional costs that come with a minimum wage increase.

Increased Taxes

Social Security taxes are calculated at 6.2 percent of taxable wages paid to each employee, and Medicare tax is calculated at 1.45 percent of all taxable wages paid to each employee. Federal unemployment tax is calculated at six percent of the first $7,000 paid to each employee for the year. (In those states that require state unemployment tax as well, you may receive a 5.4 percent credit.)

State Disability Insurance

As a whole, the cost of providing disability insurance access is roughly 1.0 percent of total compensation cost. On average, this costs an employer $624 a year for a full-time employee. (It should be noted, however, that most service workers, the largest population of minimum wage earners, do not have access to disability insurance through their employer.)

Workers Compensation Insurance (based upon payroll)

Any employee is considered covered under workers’ compensation insurance, regardless of their full or part-time employment status. To calculate the cost of workers’ compensation premiums, multiply the annual payroll by the rate classification.


Some argue that the increase in minimum wage will be too much for many employers, causing them to relocate to other states (or countries, as is the concern for the manufacturing industry) with a more affordable cost of living, friendlier tax base, and lower wages, or shut their doors all together. The effects of this, then, cause an even larger problem of underemployment and unemployment. Many also make a case for the inevitability of employers to eliminate jobs, placing more burden on those employees who remain, and the increased likelihood of service businesses putting even more automated options in place; think self-checkouts, self-managed kiosks and self-service options.

In addition to the base pay of minimum wage workers, there is something to be said for the compensation amount of those employers already paid above minimum wage, based upon their education, skills, and experience, who may expect to make a compensation amount that reflects a specific range or percentage over and above the minimum. Employers will be in the position of needing to consider the increase in pay of those workers who do not fall into the category of minimum wage earners.

While we’ll need to analyze and assess the impact minimum wage increases are having across those cities and states who have implemented the change, historically speaking, from the business oriented Employment Policies Institute, it has done little, if anything, to improve poverty levels throughout the country. What we do know is that the numbers speak for themselves with regard to what the immediate financial output will look like for employers. (Visit this site for more information on the basics of minimum wage.)

 

 

Like many other societal issues, there is no single right answer to minimum wage. Employers should really be asking themselves: What is the value of the effort provided by our employees and how can we afford to compensate that effort?

For employment consulting and support, contact the experts at The HR Manager

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