Increasing Benefits Without Reducing Jobs

Thought leaders on the left believe we can save federal government dollars by making employers pay more to their employees.

Ralph Nader’s recent blog on the Huffington Post cites a Center for American Progress study that welfare rolls would drop by 6 percent if a minimum wage of $10.10 were adopted nationwide.

The union-funded Economic Policy Institute claims a savings to the federal government of $7.6 billion if the minimum wage were so increased. And all three of the Democratic candidates for president believe that making business pay higher wages or health care benefits to their employees will result in a net benefit to the federal budget. (Republican Ben Carson has said the same thing; though his position has been in some flux lately.)

It is true that making employers pay wages above what an employee would otherwise make, and forcing employers to pay for health insurance they previously didn’t offer, will save the federal government some money by reducing welfare. But at how much cost to private employers? Using EPI’s numbers, the proposed increase in the federal minimum wage from $7.25 to $10.10 would cost employers $31.67 billion a year.

For Obamacare, large American employers must pay $15 billion more per year in health care insurance, according to research by Sally Pipes, head of the Pacific Research Institute, published in Forbes. The White House does not disagree. The administration points to savings by the federal government on Medicare and Medicaid as employers pick up those costs due to the mandate to provide employees with health insurance.

To minimize these additional costs, employers who can will substitute automation for labor. You can already see this trend in fast-food restaurants that have installed tabletop electronic devices for placing orders. A higher cost for employing a worker leads to an incentive to restrain hiring from what it would otherwise be.

Suppose, instead, we gave the same amount of money to employees, but had it come from an increase in the federal income tax on businesses. The result would be a reduction in the company’s income, just as in the case of the minimum wage increase and the Obamacare mandate.

But the reduction would not be proportionate to the number of employees an employer would have hired, so there would be no incentive to substitute machines for employees. If our goal is not to impede the growth of employment as we add to workers’ benefits, this is obviously a better solution.

This approach appears even more advisable when we consider that a federal wage subsidy to lower-income workers, administered by cutting their payroll taxes, and a federal subsidy for health care for low-income Americans, administered through Medicaid, are more efficient ways of helping low-income workers than compelling employers to provide a higher salary or employer-funded health insurance.

The White House appropriately takes pride in the fact that many more American workers are now covered by health insurance than before Obamacare became law; but this is almost entirely due to Obamacare’s expansion of Medicaid, not expanded employer-sponsored programs. The latter have become more costly, not less, because of Obamacare.

To compare a minimum wage increase with direct federal benefits for low-income workers, whether by lowering the payroll tax or increasing safety net programs, it’s instructive to take the EPI at its word. EPI claims “safety net programs would save 24 cents for every additional dollar in wages paid to workers affected by a minimum-wage increase.”

Turn that around, and it appears we could save an employer a dollar for every 24 cents spent by the federal government relieving an employer of a mandated higher wage. The obvious step is to have the federal government provide safety net programs worth 24 cents, tax the employer to pay for it, and leave 76 cents in the employer’s pocket. We can make employers pay $31.67 billion more through a higher minimum wage, or have the federal government pay $7.6 billion more in greater welfare, for the same effect, according to EPI.

I suspect the reason we don’t embrace this approach is that there is a political price to proposing a tax, but not a mandate. We don’t call it a “tax on employers” when we increase the minimum wage, or mandate that they provide health care coverage. The economics, however, are the same, except that, with the tax, we are not punishing employers for the act of hiring a lower-income employee.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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