Has it occurred to anyone that the increase in the minimum wage that took place on June 24th is also an increase in the Social Security Withholding Tax? 7% or so of the additional $.70 made every hour by every minimum wage employee goes straight to the Treasury Department with an additional 7% coming from the employer.
If you assume that very few workers will be laid off as a consequence of the increase (as some believe—the evidence isn’t dispositive either way), that means that nearly all of the workers being paid the minimum wage will hold on to their jobs even with the increased cost. Let’s see. 2 million minimum wage workers X 2,000 hours per year X 15% of $.70 is $420 million. Not a vast amount but it’s something.
That’s one way to shore up the Social Security Trust Fund I suppose but I thought that the prevailing wisdom was not to raise taxes during a recession. Note that this isn’t an argument against the increase. The Congress could have suspended the tax increase but they elected not to.
The minimum wage has many features similar to a tax. It creates a “tax wedge” (aka dead weight loss) just as if you imposed a tax on buyers of labor. You can think of the minimum wage thusly,
market clearing wage + per unit tax = minimum wage.
Where instead of the per unit tax going to the government it goes directly to those workers who manage to get jobs at the minimum wage.
In short, the minimum is very much like a tax and not just becuase of the Social Security tax.
It’s a price support for labor and it works like any other price support.
It would have been politically impossible for the Congress to postpone or repeal the increase in the minimum wage but not amending the legislation to at the very least postpone the tax increase was simply boneheaded.