Health Insurance vs. the Minimum Wage

It’s the August recess for members of Congress. So everyone’s life, liberty and property is temporarily safe.

Well, almost everybody. Before they left town, this largely do-nothing Congress did one very bad thing. They hiked the minimum wage from $5.15 an hour to $7.25 an hour as of July, 2009. The 7 million or so workers who are affected by this change potentially face a double whammy: loss of a job, loss of health insurance or both!

Anyone who has taken Economics 101 knows that price floors cause surpluses. In the labor market, we call that unemployment. Moreover, those who get priced out of the market are the least skilled. Except for a few poorly designed studies, most economists come down on the side of common sense. If a worker can produce only $5.15 of goods and services an hour, no employer is going to pay him $7.25.

When I was young, teenagers ushered people to seats in theaters, pumped gas, washed cars, waited tables, and actually helped customers find things in stores. Today, we have floor lights, self-serve pumps, automatic washes, fast food, self-serve stores and a teenage unemployment rate – especially a black teenage unemployment rate – that is many multiples of what it once was. We also have one in every four young black males somehow involved in the criminal justice system.

[By the way, a fascinating area of inquiry for some enterprising soul is the relationship between the Democratic party and the economics profession. Democrats, during the Kennedy administration, brought Keynesian economics (at that time it was mainstream economics) to Washington. And President Kennedy was well aware of the benefits of free trade and the concept behind the Laffer curve. Yet today’s Democrats (at least the ones who get on national TV) seem to have no understanding of economics on issues ranging from the minimum wage to Social Security to gasoline prices to international trade. Paul Krugman wraps many of these conundrums into a single persona. Even though he is a well-respected economist, his highly partisan columns in the New York Times – especially on the minimum wage and Social Security – are indistinguishable from the opinions of an economic illiterate.]

Anyway, labor compensation comes in two parts: cash wages and fringe benefits (the most important of which is health insurance). Most minimum wage laws set a floor on cash wages and leave benefits to be determined in the market. Not surprisingly, studies show that among workers who retain their jobs, employers reduce benefits dollar-for-dollar with the increase in the cash wage. Independent of the effects on the worker, this result is socially bad.

No one knows how many minimum wage workers (or more precisely, how many workers within $2.10 of the previous minimum) have health insurance acquired through their employers. At least I don’t think anyone knows. But we must be talking about hundreds of thousands. Health insurance for every one of them is at risk.

Why would politicians want to tell people that if they can’t produce $7.25 an hour they can’t work? Why would politicians want to tell people that if they can produce only $7.25 an hour they have to take all their compensation in cash and none in health insurance?

I don’t know the answer to these questions. But on the assumption that Congress was not just throwing a mean-spirited sop to the labor unions and really wants to help low-wage workers, I have three proposals everyone should like – liberals and conservatives, Democrats and Republicans, altruists and curmudgeons – one and all:

  1. Allow employers to count health insurance expenses against the minimum wage increase (so up to $4,200 of the mandated increase for a full-time worker could go to health insurance).
  2. Allow employers who do not provide health insurance to use the increase to purchase non-taxed, individually owned insurance instead of paying taxable wages.
  3. Allow employees to choose between taxable wages and non-taxed, individually owned health insurance.

Also, many states and cities have minimum wage laws – often several dollars higher than the federal law (San Francisco’s is $9.14 an hour). The above options should apply to the state and local level as well.

This is my last Health Alert until September, at which time Congress will return and (as reported in a previous Alert) will resume its efforts to deprive little children of their private insurance.

Have a great Labor Day weekend.

For an NCPA Brief Analysis, “Saving Health Insurance From the Minimum Wage,” see .

Comments (6)

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  1. StillaScot says:

    The negative relationship between higher minimum wage levels and lower rates of health insurance is well-established. See Baker's paper, for example:

    Yet the reverse relation between health insurance coverage and overall income level is much more strongly established. So a rise in income at the lowest end of the pay scale hurts health insurance coverage for an already small percentage of the numbers who benefit from the pay increase. You claim that we do not know the absolute numbers – but we do know that this group has the smallest percentage coverage. Still I do agree that relief for employers who provide health insurance is a useful addendum to this increase in the minimum wage.

  2. David Lenihan says:

    good clear thinking……as usual.

  3. Dr. Bob says:

    A fascinating assessment.

  4. David Cohen says:

    One thing that’s happening is that the minimum wage forces the total compensation mix to move from untaxed to taxed. Wages are subject to Social Security and Medicare taxes. Benefits are not. So, for each $1.00 spent by the employer on health insurance, the employee receives $1.00 worth of health insurance. For every $1.00 spent by the employer on wages, the employee receives approximately 85 cents and the government receives 15 cents. (I’m ignoring the SS tax cap, since we’re talking about minimum wage workers.)

  5. Private Krankenversicherung says:

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  6. Chacha says:

    The simple anwesr is Freedom of Choice. First of all you must understand that there is a great deal of fraud involved with Government run Medicare. Scam artists regularly milk Medicare out of BILLIONS of dollars. Private insurance companies are out to make a profit and therefore investigate the claims much better.It should also be noted that Medicare has approx $1100 deductible each year for hospital coverage and $162 per year for Outpatient deductible. After that the member is responsible for 20% co-insurance. Add to that the fact that there is no routine dental coverage, no routine vision coverage and no prescription drug coverage.Private plans are requires by law to follow federal guidelines that either meet or exceed original Medicare coverage. Most of them far exceed these guidelines. Many plans offer dental, vision part d coverage and even health and wellness, transportation and/or fitness classes (health club memberships)The private insurance companies receive a set monthly per member fee as determined by our federal government and not a percentage. If this amount is less than the cost of care for a certain individual the insurance company is liable to pay with no additional reimbursement.Insurance is actually defined as pure-risk but closely monitored by underwriters. They have an idea of what health care costs but there are so many variables that there is no clear cut number that can actually be obtained. It is all based upon estimates.Private insurance competes for more business and thus offers additional benefits and lower co-payments in order to entice more people to join their plan. We can all keep blaming the big bad insurance companies or give the reigns over to the government who will dictate what we deserve and what they feel we need. What a novel idea. Our government thinks they are more intelligent than we are and has decided that we are too stupid to decide what is best for ourselves.With all of that being said. Everyone still has a choice to have original Medicare or choose a private plan. Medicare advantage is growing at an incredible pace and there are over 11 million seniors and growing who have made this choice. I will side with Seniors on this one. They know what works because they use these programs every day. Not everyone will ever have the same opinion but the overwhelming majority of seniors will tell you quit screwing with my Medicare They like what they have