NCPA - National Center for Policy Analysis

The Wage Hike Is Really a $5,700 Tax

September 10, 2014

The proposal to raise the minimum wage from $7.25 to $10.10 per hour will hurt hiring and dampen employment prospects for many workers.

According to Mark J. Perry, scholar at the American Enterprise Institute, a more apt description for the wage hike is a $5,700 tax per full-time unskilled worker:

  • If businesses are forced to pay an additional $2.85 per hour for all unskilled laborers, that amounts to what Perry calls an "unskilled labor tax" of $114 per week, adding up to $5,700 annually for each minimum wage worker that is employed by a business.
  • Moreover, the figure is actually higher, because employers must contribute 6.2 percent to FICA, 1.45 percent to Medicare and 0.6 percent to the federal unemployment tax.
  • With those payroll taxes, the wage hike would actually cost employers $6,170 per worker.

Businesses will not simply absorb these costs; they will look for ways to minimize the $6,000 tax by reducing the number of workers they employ, cutting workers' hours, halting additional hiring or finding ways to use automation to replace work done by employees. Employers may also cut employees' non-monetary fringe benefits rather than eliminate their positions, something that NCPA Senior Fellow Richard McKenzie described in a recent study showing how minimum wage hikes hurt workers by cutting back on non-monetary, yet valuable, fringe benefits.

Source: Mark J. Perry, "Instead of $10.10 per hour, think of the proposed minimum wage as a $5,700 annual tax per full-time unskilled worker," American Enterprise Institute, September 4, 2014.


Browse more articles on Economic Issues