Minimum Wage, the Affordable Care Act and Unemployment

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Unintended Results

Legislators that approved the last increase in Federal Minimum Wage in 2009 and the Affordable Care Act (Obamacare) into effect during Barack Obama's first presidential term did not intend for Unemployment Benefits to be reduced in response. However, because of employer workarounds to offset the new legislation and its costs, this is what is occurring some places in the USA. Further increases in minimum wage may cause additional workaround cuts to employees in 2013 and 2015.

Not all employers are making these cuts, but some are doing so. Under a 2012 proposal for the Fair Minimum Wage, that minimum rises to $9.80/hour, with ideas of $10.00/hour by 2015. If this occurs, look for additional cuts in workers' benefits and hours and another increased demand for worker productivity to rise in some industries (traditionally, the fast food, casual dining, hotel, and retail sectors).

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Examples: Labor Cuts In 1980 and 2009

Under Presidents Jimmy Carter and Ronald Regan

In 1980, when Federal Minimum Wage increased to $3.10/hour, the largest fast food chain in Columbus, Ohio cut employee costs by

  1. Reducing all non-management employees to part-time status of 20 hours a week or fewer (saving the cost of Unemployment Insurance Premiums),
  2. Reducing the number of workers scheduled on each shift (demanding increased productivity), and
  3. Eliminating healthcare insurance coverage at the restaurant level for non-management workers.

In 1982 under the Ronald Reagan Administration (1981 - 1989), two restaurants in this Number One Chain closed for business in Columbus - an unheard of event.

In the 21st Century

In 2009, when the minimum wage rose again, fast food restaurants and other companies again cut employees from each work shift. Because of the movement toward temporary employment and part-time workers since about 1956, many employees were working fewer than 35 hours per week (the threshold for Unemployment Insurance to kick in, at least in Ohio).

Again, the largest chain of fast food outlets in my city in Ohio cut workers in some of their restaurants to counteract the $7.70/hourly labor cost, plus Workers Compensation premiums (paid by the company) and employer's Social Security Tax contribution (half paid by the company, half paid by the worker). The most extreme case of these cuts occurred in a unit on the city's busiest street.

The manager of the unit in question cut the lunch rush work crew to include only three people: 1 grill person that prepared all sandwiches and some fried items, 1 order taker/cashier for the front line registers and the drive thru window who also drew all beverages and cooked all french fries, and an assistant manager to help the other two workers. Cooking began far enough ahead of the rush that a sizable amount of food was ready, but became cold and unpalatable before it was served. Special orders were denied. When the long lines at the front counter and Drive Thru dispersed, the order taker/cashier also cleaned the dining area and restrooms and removed trash to the dumpster.

The lunch rush lasted approximately one hour on weekdays and cost the franchise owner (a company in its own right) only about $20.00 in total crew labor costs to produce about $600 in that hour with an average customer check of about $4.00. That comprises a crew labor cost of far under 1.0% However, the labor cut cost that company additional dollars in wasted food and paper costs, lost business from customers that walked out, and a higher employee turnover and absentee rate. The crew labor cost skyrocketed to a high percentage during afternoon and evening hours, because sales dropped significantly, but no further crew could be cut and still allow for operation of the restaurant.

In order to stay open and stave the loss of patronage, the company scheduled additional workers for the lunch rush.

Announced Labor Cuts in 2014

Penalties levied against employers not offering healthcare insurance coverage to employees working 30 or more hours per week beginning January 1, 2014, can amount to $2,000 per employee. Some employers, in fast food and casual dining outlets, retail stores, and similar places announced a plan to reduce most or hourly employees to a a work week of under 30 hours, the threshold at which insurance coverage must be offered.

Again, in Ohio and other states, this work week reduction also eliminated Unemployment Insurance premiums for companies, because employees working fewer than 35 hours per week were already not covered by Unemployment Insurance under these states' laws.

Thus, some employees would find themselves underemployed and with no Unemployment Benefits if laid off. Ohio is also an At Will Employment state in which workers can be terminated for any reason or for no reason.

See The Healthcare Law and Work Shifts, at finance.yahoo.com/news/health-law-spurs-shift-hours-022100532.html

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Possible Trends

The trend toward temporary employment and short-hour work weeks may have begin with the fast food industry in the mid-1950s. This industry quickly became one to demand high productivity from crew workers at low wages and to encourage crew employee turnover to avoid labor costs like health insurance, vacation and sick days, Unemployment Insurance Premiums, etc.

Temporary Employment Agencies seemed to build out of this fast food labor trend as it spread to other industries, followed by the rise of the use of Independent Contractors, the ultimate employee cost saver.

In non-union workplaces where salaried employees work without contracts, some workers fear that even their employment status could be reduced to save company costs, either by job attrition and combining of duties, or by outright work hour reductions and/or pay and benefits cuts. Some industries may easily escape these possibilities, including the expanding Aerospace Industry, Energy, and Healthcare (depending on the impact of Obamacare on that industry).

Federal Minimum Wage Increases in USA

Each time that the Federal Minimum Wage has increased, prices of consumer goods and services have risen to make up for that heightened labor cost. In that way (oversimplified), raising the minimum wage increases inflation.

Table I. Short History of the Federal Minimum Wage

Year
Federal Minimum Wage
Fair Labor Standards Act (FLSA) passed in 1938
$0.25/hour
1950
$0.75
1956
$1.00
1968
$1.60
1980
$3.10
1997
$5.15
2009
$7.25
2014
$10.10 on federal contracts
Selected years of increases for a quick comparison over time. Since 2000, some US State Minimum Wages are higher than the federal amount.
Source

Since 1989, any American business that earns less than $500,000 per year are not subject to minimum wage laws. They may pay workers less per hour.

In 1997, President Bill Clinton signed into law an act that gave the US States the right to set their own minimum wage rates. Today, some of those state minimums are higher than the federal rate, including in my own state of Ohio ($7.80 vs. $7.25).

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Comments 15 comments

rebeccamealey profile image

rebeccamealey 4 years ago from Northeastern Georgia, USA

Fantastic and informative Hub. I especially liked the table depicting the rises in minimum wage throughout the years. Economics have never really interested me, but these sound like common issues for all. Thanks for renewed interest on this most important subject!


Patty Inglish, MS profile image

Patty Inglish, MS 4 years ago from North America Author

Thank you, rebeccamealey -- The next few months will be especially interesting in results from our new healthcare provisions in early 2013. Later, we might have a number of people working 2 or 3 pat-time jobs, but we already have some of that now.


Kathleen Cochran profile image

Kathleen Cochran 4 years ago from Atlanta, Georgia

The law of unintended consequences seems to come into effect in everything the government does. The lowest paid segment of our economy always seem to suffer those consequences.

Your hub shows the reality of what happens when we try to improve the lives of those at the bottom of the ladder: Those just a few rungs up the ladder snatch the improvement for themselves. Before business people blow a gasket at that comment let me say I realize most businesses have a very small profit margin. But if they let minimum wage increases effect the consequences they are created for, their business would benefit in the long run with a more stable work force. Unfortunately, that usually isn't what happens.


mpropp profile image

mpropp 4 years ago from Minnesota

Very interesting statistics. Did they really go from 1980 to 1997 without increasing minimum wage? I think I got my first part-time job at a food place in 1986 and I'm pretty certain it was $3.10 an hour...Crazy to think of how busy those fast-food chains are at lunch time and trying to have 3 people handle it?! I think I would need a longer lunch hour!


Patty Inglish, MS profile image

Patty Inglish, MS 4 years ago from North America Author

@Kathleen - Some employers raise wholesale and retail prices of goods and services instead of cutting employees, but some raise these prices AND cut employees.

The rise in minimum wage from $2.65/$3.10 per hour affected the fast food business severely - A McDonald's requiring 15 people for 2 hours at lunchtime put about $14 extra wages on the floor in minimum wage crew, plus the SS and UI taxes and some other crew related costs. This added too much to their labor cost percentage of sales, but in the mid-afternoon, the labor cost percentage skyrocketed, because sales were so low usually from 2pm - 5pm and 3 crew was as low as they could go. and after 7PM, the labor percentage was even higher. Cutting help caused a loss in business and by 1981, 2 large McDonald's here closed down. In a few more years, all remaining company units were sold to franchisers. It's been said that the acceptance of a labor union into this chain here would put them all out of business with higher wages, because the public would not pay the needed extremely higher menu prices (double or more) - A Big Mac here is already $4.00 and way too expensive. Fast food might need to pass away.

@mpropp - I didn't list all the increases, but a big one came in the mid-1970s to $2.65. Truly, I had difficulty finding all the increases, but since you ask, I'll keep looking.

Can you imagine working for $1.60/hour in "modern times" like 1968? Ohio was allowed to pay lower training wages for the first month on a job, too -- $1.25/hour.

Fast food is a specialized, tightly controlled affair that may have seen it's best days in the past. I really think it may die as an industry because its pillars have been cheap, hot food made and served fast by mostly lowest-paid wage workers. Very few places are left where one can make a living wage as a fast food crew worker and be covered by UI and have benefits like health insurance, vacations, etc.


Maren Morgan M-T profile image

Maren Morgan M-T 4 years ago from Pennsylvania

Health insurance from an employer - what's that? (No reply needed.)


Patty Inglish, MS profile image

Patty Inglish, MS 4 years ago from North America Author

OMG I know! - Most of my former employers did away with it, beginning back in the 1980s.


BDazzler profile image

BDazzler 4 years ago from Gulf Coast, USA

Excellent article, clear, factual and to the point.

Not to sound TOO cynical, but I guess I don't see how these consequences can be "unintended" ... your article clearly shows that historically, when minimum wage goes up, benefits and hours go down and it's also inflationary, because the price for the same goods/services must be raised to meet costs. It's also intuitively obvious that this could occur.

(If I make $1 and a loaf of bread costs 25 cents I work 15 minutes to buy a loaf of bread. If I make $10 an hour, and a loaf of bread costs $2.50 I work 15 minutes to buy a loaf of bread. At best, there's no real change. )

Your article is quite clear that this has been occurring for nearly 75 years. I have to believe that legislators find the short term illusion of giving people more is more important to them than the underlying reality.

Again, great work!


fetty profile image

fetty 4 years ago from South Jersey

But the sad truth is ; that if the huge corporation does not start paying for health insurance for the lowest wage earners , the working poor middle class will . We are self-employed and have always found that are medical makes us poor! Also, we have a governor , who is currently not contributing into the teacher's/police and firemen's pension fund because he says it soon will go bankrupt anyway! As a teacher I was required to contribute to this fund or not get the job. I have since retired early and have started a second career to pay my bills and to afford some entertainment in my later years. New Jersey does not seek enough Federal funds and grants compared to lower populated states ; so our real estate taxes are No. 1 in the nation. Recently, Gov. invested millions from the teachers pension in his brand new casino "Revel". Smart huh!, Actually , we recently walked the property pre- Sandy and it was absolutely stunning . It is only 15 % casino but is supposed to be a one stop vacation location. It makes the other casinos look shabby and it was jawing dropping beautiful.

I hate this man with a passion but if this 'gamble' works , I 'll eat my hat. ( We gamble maybe three times a year and live within an hour of Atlantic City.) However, there are still plans for Pennsylvania to put in 5 more casinos at their state borders which should really hurt A.C. I want you to know how much I admire your writing and your amount of writing . You are amazing! Have a great day!


Patty Inglish, MS profile image

Patty Inglish, MS 4 years ago from North America Author

@BDazzler - That certainly sounds correct the way you state it. Planned inflation may be a fact, after all. I was just discussing this with a friend tonight -- Looking at some monthly profit and loss statements, it looks to me that when the Fed. Minimum Wage rises to $9.80/hour, fast food places in my city will not only need to cut a few more crew from lunch-rush schedules, but also raise menu prices about 50% in order to make a profit. I don't think a $6.00 Big Mac or Whopper will be popular. I think reducing everyone on a crew to fewer than 20 hours weekly would probably work only in a college campus-area unit where part-time workers are more plentiful.

A couple of McDonald's in America are Drive-Thru only, located near busy Interstates, and they seem to turn a larger profit that full shops, with smaller buildings/grounds, less use of utilities, and fewer crew needed to work this assembly-line type operation. One other McDonald's, in Meridian, Mississippi, used to have a cafeteria line set-up where customers picked up what they wanted and proceeded to the cashier - this also cut crew needs.

McDonald's makes more profit in real estate than all their restaurant sales combined, so abandoning the fast foot concept may not be bad for them, but it will be bad for workers that lose those jobs.

@fetty - I am dismayed to hear about the teachers' pension troubles you describe. It sounds to me that many types of company pensions are being eliminated entirely and I saw some of that in the 1980s - pensions, healthcare, and other benefit cuts made by some large, prosperous companies during the Reagan Administration years. Many of those particular companies used the money to increase dividends to their stockholders and some even used the money from the cuts to provide pay raises for top management. Minimum wage had indeed risen at the beginning of that decade, but the cuts were far higher than warranted by that wage increase.

As for healthcare, I am waiting to see what actually happens in 2013. I've a friend who could die without treatment and she has no income of her own and no insurance. Her husband is very near retirement, has a very low-paying job, and no money left for insurance; but he makes too much for her to receive Medicaid. She cannot qualify for Medicare for several years.

Looking at the healthcare premiums under the Affordable Care Act, moderate-income middle class earners in their late 40s to 60s will pay enormous amounts monthly, up to $1,100+/month if they have no other health insurance. $12,000+/year premium is not fair to a group that may never receive their Social Security contributions back in retirement, because they have to work until they are 70 or 75 for full benefits (true - I must work to 70).

Thanks for your kind words!


MJ Miller profile image

MJ Miller 4 years ago from East Tennessee

Very informative and interesting hub. So many times laws are enacted with good intentions but they fail to foresee the adverse effects that will result. Sometimes it seems like the more laws that are passed, the worse things get. Good work!


Patty Inglish, MS profile image

Patty Inglish, MS 4 years ago from North America Author

It's a conundrum! How do we get workers more money without causing inflation? Don't know yet.


MJ Miller profile image

MJ Miller 4 years ago from East Tennessee

Well, one way is through job creation. The laws of supply and demand work in the job market as well as the sales market. If unemployment is very low and there are more jobs than there are qualified workers to fill them, employers are forced to pay more to get the best employees. Unfortunately, the present administration isn't business friendly, so job creation is going to be slow for a while.


innerspin profile image

innerspin 3 years ago from uk

Very interesting read. I know people want a reasonable wage, but never quite understood how a set minimum is a good thing. Employers can't just magic money from thin air. It's no wonder so many small businesses have gone bust.

Here in the UK, minimum wage has increased while many other workers are on a pay freeze. I've not had a rise in three years, so the minimum wage is creeping nearer mine. It might get to the point I may as well leave twenty years experience in my job and be a cleaner nearer home so there are less travel and parking costs. And breathe. Sorry! Very thought provoking hub.


Patty Inglish, MS profile image

Patty Inglish, MS 3 years ago from North America Author

Thanks for the view of the situation in the UK!

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