The federal minimum wage is $7.25 per hour, and many are calling for a raise in minimum wage, stating that there’s no way that an adult can live off of that wage. The impact of minimum wage increase would impact our economy as a whole. The conversation forces people to look for a balance between benefits for the individual versus the benefits of the people as a whole.

minimum-wage

The image is from a Facebook debate regarding how minimum wage impacts individual tax. First off, this was a poor example just based on the math, which is incorrect. If your paid wage went to $18.45 a day and you were still taxed at the rate of 23%, you’d make $14.21, which means you can’t afford a $15.00 milk. So, based on the scenario in the image, you’re actually better off making $1.23 a day, because after being taxed 23%, at least you can still buy the $1.00 gallon of milk.

Here is a better math example, and the impact that it would have on businesses: A business has 10 employees, and each employee receives an increase their hourly wage by $3, from $7 to $10, and they each work 8 hours a day. The business now has an increase in payroll of $240 a day. On a small scale, that may not sound like a significant increase. But the business now has to account for a payroll that has increased by $1200 a week. When you look at the annual impact of that increase, the payroll has grown by $62,400, without adding any staff, just additional expense.

Now, with the same staff, the business must make up that money in additional sales with the current staff in place. The easiest way for a business to do this is to increase the price of the product or service that they offer. Let’s go back to our $1.00 gallon of milk. If the business sells 1000 gallons of milk per day, they’re making $1000 per day. To cover the $240 of the increased payroll, the cost of a gallon of milk has to increase to $1.24. An extra quarter for a gallon of milk doesn’t sound to bad, but for the average individual consumer, why would you want to pay 24 cents more for a gallon of milk that does nothing different than it did yesterday?

Here’s an alternative option that the business has. The business can reduce the current staff by 3 people, which would then balance out the $62,400 in additional payroll. The remaining seven employees would then need to work harder to maintain the production level of ten people. As a result of a change in minimum wage, the business would need to reduce it’s workforce by 30% to maintain business without impacting the consumer pricing. While the 70% of the business staff remaining received the benefit of a wage increase, three people lose all of their income as a result.

While individual states have done a great job regulating minimum wage on their own, there’s still a huge disparity across the country. Georgia has a minimum wage of $5.15 (up to $7.25 if covered by Fair Labor Standards). Massachusetts has a minimum wage of $11.00, which is the highest in the United States and $3.75 above the federal minimum wage. Washington D.C. will increase to $11.50 beginning on January 1st, 2017, becoming the highest* minimum wage in the country.

Although there are so many things to look at in regards to the minimum wage debate, it is easy to see the impacts on businesses, as well as possible impacts on consumers. Minimum wage, from this perspective, could hurt more than it could help.

*Comparisons were only done at state level. Individual counties have larger minimum wages, which are above the state minimum.

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