Total Compensation is key to gutting a real minimum wage

The editorial was printed in the April 24 ’14 issue of the Capitol Hill Times. It is not yet available on their website.

In last week’s edition of The Capitol Hill Times, business analyst and former president of the Association of Washington Business Don C. Brunell argued that Seattle’s minimum wage should be based on “total compensation” rather than wages per se. “Total compensation” means that the cost of employee benefits (like health insurance or paid leave) get counted as part of an employee’s wage. Brunell uses the example of a fast food worker who makes $12.25 per hour but whose total compensation is higher because of “merit raises, paid vacation, health insurance, management training, education scholarships, childcare assistance and a 401(k) retirement plan.” He suggests that a total compensation-based minimum wage is the best way to protect employees from cuts to their jobs or benefits.

There are several problems with Brunell’s argument. To begin with, he claims that “no city or state has ever attempted to raise its minimum wage by 60 percent.” This is incorrect. In 2004, San Francisco raised its minimum wage from $5.15 per hour to $8.50—an increase of 60%. (Since then, it has climbed to $10.74.)

Brunell goes on to write that “Most experts agree that the more extreme and abrupt the increase, the more economic casualties it creates—lost jobs and lost opportunities.” Again, this is inaccurate. UC Berkeley researchers reviewed studies of San Francisco’s minimum wage increase (among other data sources) for the Seattle Income Inequality Advisory Committee. According to their report summary, contemporary economists generally recognize that “raising the minimum wage does not automatically mean that employment will fall.” Instead, increased labor costs can be offset by minor price increases (e.g. 0.7%) and lower employee turnover. Empirical studies of local minimum wage increases have found “no statistically significant negative effects on employment or hours (including in low-wage industries such as restaurants).”

Brunell goes on to list various non-wage ways in which businesses “compensate” workers which he says should count as part of their legal wage. Oddly, his list of “employee benefits” includes Social Security taxes, Medicare taxes, worker’s compensation insurance, unemployment insurance, and healthcare. These are strange things to list as “employee benefits” because—ignoring the fact that many workers never even reap the fruits of these programs—each of them is required by law (excepting healthcare for small businesses). But the most bizarre “employee benefit” he lists is not anything mandated by the government. It’s “free management training” for fast food managers. According to Brunell, these employees should consider time spent learning how to do their job as part of their paycheck. This is like a restaurant counting the “free use of kitchen equipment” it provides to its cooks as part of their wage.

Some of the other benefits Brunell cites are, in fact, benefits. For example, he accurately points to paid leave, retirement funds, and tuition reimbursement. But here’s the catch: businesses receive tax breaks for these kinds of benefits. A business that “pays” its employees partly through such fringe benefits (as the IRS calls them) recoups at least some of that money elsewhere via discounted taxes. It’s a win-win-win for businesses, who get to shift some of the cost of employee benefits onto taxpayers; advertise these benefits as part of an employee’s “wage” to potential new hires; and create good PR by claiming that their “generous benefits” are primarily motivated by concern for their employees rather than bottom-line calculations. (By the way, the UC Berkeley researchers also found no “evidence that employers absorbed minimum wage increases by reducing health benefits or pensions.”)

Brunell concludes by suggesting a tiered minimum wage system based on education, in which higher-educated workers get a higher minimum wage. This is the kind of idea that makes economists of all stripes either laugh or cry. After arguing for several paragraphs that Seattle should butt out and let employers “compensate” their employees in any form they want—US dollars, healthcare plans, gold doubloons, refined sand—Brunell appears to be calling for Soviet-style price-fixing by the city government in the labor market when he endorses the idea that “the minimum wage should increase with education and skill levels.” Leaving aside how this would discriminate against any group of people with diminished access to higher education, and ignoring how it would incentivize superficial degree programs which eschew substantive learning for rubber-stamp diplomas, let’s note how this is exactly the opposite of how an effective minimum wage policy would work. A minimum wage is not supposed to replace the labor market; its function is to set a price floor, at or above which businesses can bid for employees. This creates upward pressure on all wages as businesses bid against each other for higher-skilled employees. Setting multiple “minimum” wages based on some official measure of what counts as “skilled” would foster injustice, fake schooling, and gross inefficiency.

One last point to note in Brunell’s article is his ostensible, oft-repeated concern for employees; he stresses that his objective is to promote employees’ success, not businesses’ profits. (Brunell does not explain why, if total compensation is good for workers, business folks are the only ones advocating for it.) I’ve never met Mr. Brunell; he may be a saint. But it’s broadly true that opponents of a $15 minimum wage have been using workers’ well-being as a sort of rhetorical human shield. As I’ve written in the past [“Workers Aren’t Family, and Feelings Aren’t Pay,” March 21, 2014], this rhetorical strategy is self-deceptive at best and crassly dishonest at worst. Business owners may subjectively feel like they care about their employees, but objectively—as actors in a competitive market—those owners are compelled to extract maximum labor for minimum pay from their workers. The ones who don’t will quickly go bankrupt.

A total compensation-based minimum wage would create a labor price floor with a massive hole in it. As a business analyst, Bursell should know the importance of liquidity—of hard cash that can buy the gasoline or the train ticket or the winter coat that a worker needs right now. You can’t pay the rent with healthcare, and you can’t eat tuition reimbursements.

The truth is that total compensation is nothing other than an attempt by unscrupulous business owners to dodge a real minimum wage. Don’t let them gut $15 an hour before it’s even begun.

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