Democrats are proposing a national $15 per hour minimum wage. This is one of those issues that seems fair but cannot be fairly implemented. Other minimum wage laws show us that we can expect inflation and job losses. However, there are also some location and industry-specific problems with minimum wages that people should know too.

People who work in a small-town industry

Even AOC recognizes that different areas have different costs of living. The specifics of those different costs of living matter.

Small towns use their lower costs of living to attract industries. Workers in these areas can live as well as their urban peers while making a lower wage. Many of these smaller facilities are suppliers for the large assembly plants located at transportation centers. Put another way, a large assembly plant may have hundreds of smaller supplier plants far away from population centers.

In flyover America, these smaller factories are full of people who may have jobs with starting wages of less than $15 per hour. These are good manufacturing jobs with skills like CNC machining and robotics. They are the beginnings of good careers.

Factory work is often hard and dirty and the schedules cover nights and weekends, but people choose it because the wage is much higher than the local minimum. If a person can find easy work at the same wage, it will be harder for the factories to find employees.

The cost of moving materials is balanced by the lower labor cost. The low area cost is as true for the factory as for the factory worker. Its real estate, utilities, and taxes are lower as well. It is a tight balance. Change the labor cost significantly and many of these facilities will locate closer to the assembly plant for which they provide parts as the low wage is no longer offsetting transportation costs. Many of these small-town industrial parks will not get new jobs and will lose existing ones.

Tipped employees

AOC knows about this as well. It is true that tipped employees have a much lower minimum wage. Less known is that they must report the cash tips they get and, if it’s the total wage is lower than the minimum wage, the employer must make up the difference. The employer withholds taxes and FICA out of the total amount the employee receives. They deduct the employee share from the part of the wage that the employer pays. The tipped employee gets at least the minimum wage and employers submit the taxes to the government.

With cash tips, the employee is supposed to report 100% so that taxes can be withheld on the full amount. Almost no employees report the full 100% for cash tips over the minimum wage. It is not about whether it is right or wrong; it is reality. They can easily avoid paying the FICA tax on these tips over the minimum wage.

In addition, the employer has an incentive to encourage this. The excess tips come from the customer, but the law still requires that the employer pay the employer half of the FICA on tips even though the employer did not pay the tip. The employer wants the employee to declare only the minimum wage.

Raise the minimum to $15 and the tipped employees will pay more taxes on their tips. A greater percentage of them will not meet the minimum wage requirement for reported tips, forcing the employer to make up a greater part of the difference. This system has been around for a long time and tipped employees know how the game is played.

Employees that qualify for assistance

It is true that the minimum wage is not a living wage in areas with a high cost of living. For this reason, most states have set their income levels for receiving state assistance above what someone making the minimum wage would earn.

If the minimum wage is increased, some of these employees will no longer qualify for assistance. Their total compensation will be the same, but state assistance is generally not taxable and the new wages would be.

This would not last. It is almost certain that states will reset the level for qualification so these people can once again qualify for assistance based on a minimum wage salary. This means that the cost of state assistance will go up as the minimum wage goes up. The state pays more, but the employer pays a higher wage and both employer and employee pay more taxes. This leads inevitably to job losses and inflation.

A higher national minimum wage is a bad idea. If Congress doubles the current minimum wage, more people may get to learn that the actual minimum wage is $0/hour.

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