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John C. Goodman / May 28, 2013

Obama's Minimum Wage, Insurance Mandates Will Create Labor Market Tsunami

President Obama recently proposed raising the federal minimum wage. If the president gets his way, the mandate will jump from its current $7.25 an hour to $9 an hour and be indexed for inflation. In addition, next January the employer mandate goes into effect, which will increase labor costs even more -- all thanks to the Affordable Care Act (ObamaCare). The Congressional Budget Office estimates the cost of the minimum benefit package that everyone will be required to have will be $4,750 for individuals and $12,250 for families. That translates into a minimum health benefit of $2.28 an hour for full-time single workers and about $3 an hour for someone working 30 hour a week. For family coverage, the cost will be $5.89 an hour for a 40-hour-a week employee and $7.85 an hour for a 30-hour-a-week employee.

President Obama recently proposed raising the federal minimum wage. If the president gets his way, the mandate will jump from its current $7.25 an hour to $9 an hour and be indexed for inflation. In addition, next January the employer mandate goes into effect, which will increase labor costs even more – all thanks to the Affordable Care Act (ObamaCare).

The Congressional Budget Office estimates the cost of the minimum benefit package that everyone will be required to have will be $4,750 for individuals and $12,250 for families. That translates into a minimum health benefit of $2.28 an hour for full-time single workers and about $3 an hour for someone working 30 hour a week. For family coverage, the cost will be $5.89 an hour for a 40-hour-a week employee and $7.85 an hour for a 30-hour-a-week employee.

These are not small changes. They can double the cost of labor in some cases. With government imposing higher labor costs, the restaurant industry, for example, will try to compensate by raising prices. However, if the customers won’t pay the higher price – as may be the case in poorer neighborhoods – restaurants will have to close.

Significant Impact on Labor Market

The law does not specify how much of the premium must be paid by the employer versus the employee – other than a government requirement that the employee’s share cannot exceed 9.5 percent of wages for low- and moderate-income workers. But the economic effects are the same, regardless of who writes the checks.

Employers have four ways to reduce this burden: (1) the mandate doesn’t apply to firms with fewer than 50 workers, (2) the mandate doesn’t apply to employees who work fewer than 30 hours, (3) the employer doesn’t have to offer or subsidize family coverage, and (4) rather than provide health insurance, the employer can pay a $2,000 per (full-time) worker fine (the first 30 workers are exempt).

There are going to be lots of firms that fail to grow beyond 49 employees. A firm with 49 employees hiring one more worker would face a fine of $40,000 (50-30 x $2,000). Thus, a 50th worker, getting paid $30,000 per year, would cost the employer $70,000. But be warned: If an individual owns, say, two or three fast food franchises, the IRS has signaled that it will treat their combined operations as a single business.

Also, in calculating the number of full-time workers, the IRS is going to count “full-time equivalents.” That means that two workers, each working 15 hours a week, will count as the equivalent of one full-time (30 hour) worker.

Shifts to Part-Time Grow

Employers are already reacting to these perverse incentives. Since January there has been a huge shift to part-time employment in the fast-food industry. The reason: in deciding whether a worker is full-time or part-time next January (when the mandate becomes effective) the government will look at the average weekly hours worked in the 12 months of the previous year.

Letting part-time workers work more hours can be expensive. If a 29 hour-a-week employee works one more hour for 50 weeks, that will trigger a $2,000 fine. Dividing the fine by the additional hours of work, that works out to a $40 an hour penalty. One fast food restaurant owner I talked with (owning 100 franchises) told me the average work week for their employees has been reduced to 25 hours this year, compared with 38 hours last year.

Some employees may be able to work part-time at two different restaurants – both of which avoid the mandate by switching to part-time labor. Or workers may have to settle for part-time employment or no job at all.

Economists have traditionally believed that an increase in the minimum wage (or mandated benefits) increases unemployment. Obama’s health insurance employer mandate will destroy job opportunities for young, unskilled workers in cities and towns across the country. Things will be even worse if a 24 percent increase in the cash minimum wage is heaped on top of it.

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