So, I was working on calculating real costs and benefits from employing an employee (I’ve been working alone since I started my own company, and frankly, that part’s been great.) and realized I had the data in front of me to make a comment on labor costs and compensation.

The minimum wage in my state is $9.00/hour, soon to increase to $10.00/hour. Taking only the barest account of state and federal additional costs, that is, both income taxes, Social Security, State Disability,  Federal Unemployment Tax, and state “Training” tax, I drew up the table below:

Nominal Wage       Effective Wage         Effective cost       Wage efficiency

$9.00                       $7.14                           $10.06                   70.9%

$10.00                     $7.91                           $11.18                     70.8%

$15.00                     $11.49                         $16.76                     68.6%

One interesting thing to note here is how small the effective increase is in a raise from $9.00/hr to $10.00/hr nominal, compared to a simple removal of all the state costs. While the minimum wage hike, where it affects wages, increases nominal wages by 11% and effective wages by about 10.8%, a simple removal of all the withholding increases the worker’s take-home pay by 40.9%! And let’s remember that the minimum wage hike increases effective costs, in effect paying employers to find ways to cut back on employees, as they become more expensive. The cutting out of the state, on the other hand, has zero effect on final cost; we simply take all the money that was previously dumped into “Payroll,” and instead of splitting it between state and worker, we give it all to the worker. In effect we have a costless way of giving the worker a raise, with quadruple the effectiveness and none of the disemployment effects.

The disemployment effects of the minimum wage all arise from increasing the costs of hiring people, thus making alternatives more appealing, or conducting business at all less appealing. They all arise from the “Effective cost” column. It’s worth noting that for this table (which I just threw together quickly) the “Effective cost” of a man-hour of work grows faster than does the effective wage. In going from $9.00/hr nominal to $10/hr, the effective wage is increased by 10.78%, while the effective cost rises by 11.13%. Likewise, in going from $10/hr to $15/hr, effective wages rise 45.25%, while effective cost rises 49.91%. So what’s happening here is exactly what we should expect from progressive taxation: Every additional increase in wages is less effective at increasing the worker’s take-home pay, but increasingly effective at putting him out of work. And this affects increases in wages not due to minimum wage laws as well; it is essentially a soft ceiling on wages, progressively weakening their benefits to the worker while strengthening and compounding the burden of payroll to the employer.

I wonder if this could be neatly framed into a “One-up” against the progressives, since our solution (cut all payroll taxes to zero) is four times more effective and puts nobody out of work.