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Nonpartisan Analysis by Congressional Budget Office Weighs in on 39 Percent Increase in Minimum Wage

money dollars coinsWASHINGTON D.C. (2/19/14) — Proposals in Washington D.C. and Frankfort are being pushed through Congress and the General Assembly to increase the minimum wage to $10.10/hour from the current $7.25.

The CBO analysis looks at the pros and cons of a 39 percent increase in the minimum wage an employer can pay an employee in the United States.

On the federal level, there is a $9 per hour option (reached in two years with an automatic adjustment for inflation).

The CBO includes a revealing graph of Minimum Wage rates over the years adjusted for inflation.

The argument for increasing Minimum Wage points to the fact:

  • Inflation has eroded the purchasing power of $7.25 per hour.
  • There are few that would argue that $7.25 per hour is a “living wage”.
  • A person earning $7.25 per hour and 40 hours per week earns $15,080 per year.
  • This is above the 2013 federal poverty level for a single person household ($11,490); but, it falls below poverty for a two person household ($15,510).

The CBO estimates that, with an increase to $9 per hour (24 percent increase), approximately 7.6 million workers would benefit.

A person earning $7.25 per hour and 40 hours per week earns $15,080 per year.

An increase to $10.10 (39 percent increase) would capture even more - 16.5 million workers would benefit.

“As a group, workers with increased earnings would pay more in taxes and receive less in federal benefits of certain types than they would have otherwise,” the report says.

The CBO report is not all roses about an increase.

“Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent,” CBO projects. “The $9 option would reduce employment by about 100,000 workers, or by less than 0.1 percent.”

A higher Minimum Wage increases an Employer’s costs for wages paid; and for, employer matching taxes, unemployment taxes and workers compensation insurance premiums based on wages paid.

Many minimum wage employees are found in retail, food service and hospitality.

Employers in these areas have little choice but to pass the increased costs on in the form of higher prices.

Even with higher prices and higher taxes, the Minimum Wage employee will be dollars ahead; unless, that employee loses his or her job. When prices increase, there is less sold. People on fixed incomes will definitely be losers as they face higher food and service costs. People have only so much they can spend (disposable income). With higher prices, they will buy fewer goods and services; thus, reducing the need for laborers to provide those goods and services. Note: this does not just apply to Minimum Wage employees.

Increases in Minimum Wage rates increase virtually all hourly wages.

Employers and employees often gauge pay rate vs. Minimum. i.e. a person currently making $10 per hour which is $2.55 above Minimum would push to remain $2.55 above minimum or $12.65 per hour.

The employer would also want to keep the employee and would try to pay more. As a result, the employer must offset the increased costs with all hourly employees.

The employer’s choices are to increase prices, increase productivity (make more or do more with fewer people) or adjust other employee benefits to contain costs. Automation and outsourcing also remain options for many employers.

The CBO report clearly favors the $9 Minimum Wage over the $10.10 Minimum Wage. The report indicates a slight decline in employment at $9.

SurfKY News does not have independent projections of the impact on Kentucky employment with raising Minimum Wage to $10.10.

There is no reason to believe that Kentucky would be different.

Most agree that either a 24 percent or 39 percent increase in Minimum Wage will have a significant impact on our economy.

Also, most agree that the increase is driven much more about politics than concern for the worker.

Read the full Congressional Budget office report online.

Ron Sanders
SurfKY News

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