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## Back of the Envelope Minimum Wage Calculations

Last I checked, there were roughly 4 million workers who “earned” the minimum wage in the US (or less). This is an overstatement in some aspects, since tips are not reported here, but just treat it as 4 million. Here’s a question: how much do we think these workers would have earned absent the minimum wage? \$1 less? \$2 less? Anti-market folks think a full \$7.25 less, but let’s not attack that. Let’s assume it would be \$2 less. And let’s also assume that each of these workers would have worked a full-year at both wage levels.

How much money is the minimum wage collectively putting in the pockets of workers (assuming it ain’t coming from non-wage compensation or future unemployment or higher prices for the things they purchase, etc.)? A typical work year is 2,000 hours, so for each of the 4 million workers, they are earning an extra \$4,000 as a result of the minimum wage each year. This is a total of \$16 billion. If you believe this is how the minimum wage works, then the total “spending” by the federal government each year should be higher by \$16 billion beyond what is reported. Imagine doing this for all of the government “programs” that work in ways like this — I’d wager that federal spending, rather than being close to \$3.7 trillion, is closer to \$5 trillion each year.

Second, the estimates of the incidence of the payroll tax are that workers bear most of the burden of it despite “legally” the burden being shared. Go check out Paul Krugman’s Principles of Economics text for citations. Let’s put the figure at 90%. The proposed increase in the minimum wage is \$1.75. How much of that would workers keep in the long run? (Accepting such high elasticity estimates is at least consistent with the empirical findings that there is a small employment impact of the minimum wage) Payroll taxes are split at 7.65% between employer and employee for a total of 15.3%. Thus the wage increase would not be the full \$1.75 but rather 13.77% less, or \$1.51 per hour.

Third, and this is not a calculation, what do you think the increase in the minimum wage might do to average firm size in the economy and the prevalence of the much hated “Big Box” stores?

UPDATE: Reader Chris M. sends us this disaster of an article. I wonder if those guys sick the Cry Wolf project on themselves?

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