Pricing unskilled workers out of their jobs

COMMENTARY Health Care Reform

Pricing unskilled workers out of their jobs

Dec 4, 2013 2 min read
Patrick Tyrrell

Research Coordinator

Patrick Tyrrell is a research coordinator in The Heritage Foundation’s Margaret Thatcher Center for Freedom.

Congress soon will vote on raising the federal minimum wage to more than $10 per hour. Few realize that, from the perspective of many employers, the government has already done this.

Although the administration has announced a one-year delay in enforcing the Obamacare employer mandate, come 2015 the penalty for not offering employee health care benefits will add thousands of dollars to hiring costs. Coupled with existing minimum wages and employer-side payroll taxes, the Obamacare mandate will raise the minimum cost of employing a full-time worker to $10.30 per hour.

Under Obamacare, businesses that do not provide “qualifying” health care coverage must pay a $2,000 penalty in after-tax dollars for each full-time worker. (There is an exemption for the first 30 workers.) In pre-tax dollars, this works out to $3,279 per employee, or $1.64 per hour.

Very few minimum-wage employers can afford the expensive policies Obamacare requires, so most will pay the penalty instead. Though the penalty does not directly benefit workers, it does boost the cost of employing them.

Some lawmakers would further increase hiring costs by raising the federal minimum wage nearly 40 percent, to $10.10 per hour. This would have disastrous consequences for the unskilled workers they want to help. It would raise the cost of hiring a full-time worker to at least $12.71 per hour.

Employers would respond by eliminating jobs and by cutting workers to part-time status, the latter move of which would let them avoid the Obamacare penalty. Either way, it becomes significantly more difficult for unskilled workers to get ahead.

Businesses don’t lay off workers or cut hours without cause. But employers cannot pay workers more than they produce — at least, not for any extended period of time. That would be economic suicide.

That was a lesson from the late 1990s Internet stock bubble. Employers such as eToys and paid out more in expenses than they made in profits. It was only a matter of time before those companies and hundreds like them had vanished over the economic horizon. They now employ no one and contribute nothing to the economy.

Or consider American Samoa. The low-income Pacific Island chain used to have its own — lower — minimum wage. In 2007, Congress decided to align the U.S. territory’s rate with the mainland rate in 50-cent annual increments. By May 2009, the third increase raised Samoa’s minimum wage to $4.76 per hour — almost 50 percent more than the old minimum.

The new minimum raised wages for two-thirds of those working in the islands’ tuna canneries. And, soon, the tuna canning industry started losing money. One cannery shut down. The other laid off workers, cut hours and benefits, and froze hiring. Samoan unemployment went from 5 percent to 36 percent. American Samoa Gov. Togiola Tulafona, a Democrat, begged Congress to stop raising the minimum wage.

Minimum-wage jobs are entry-level jobs that give unskilled workers the experience they need to become more productive and merit higher pay. Two-thirds of minimum-wage workers earn raises within a year, without the government interfering. Employees who work more hours earn those raises faster.

The higher minimum now being considered in Congress effectively would require companies to find inexperienced, unskilled workers capable of producing at least $12.71 per hour in value from Day One on the job. That’s a very heavy lift — for companies as well as people hoping to enter the workforce. In practice, therefore, there will be fewer entry-level job openings available to unskilled workers.

But inexperienced workers cannot become skilled workers without the experience and on-the-job training that entry-level positions provide. Adding the proposed minimum wage hike to Obamacare’s employer penalty would cut the bottom rung off of many disadvantaged workers’ career ladders. To help unskilled workers, Congress and the president should concentrate on pro-growth economic strategies instead of job killers.

- Patrick Tyrrell is the research coordinator for the Heritage Foundation’s Center for Data Analysis.

Originally appeared in The Washington Times.

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