How taxpayers subsidize low-wage workers

This is one in a series of articles funded by a grant from the Northwest Area Foundation.

When consumers step up to the counter and order one of McDonald’s “Extra Value” meals, they probably think they’re getting a good deal. Most of them never consider how much they are paying in taxes to subsidize the labor force preparing and serving those meals.

A study completed last fall by researchers at the University of California-Berkeley concluded that front-line fast-food workers earn so little that 52 percent of them are enrolled in one or more public assistance programs. The cost to the taxpayers – nearly $7 billion a year.

“The taxpayer costs we discovered were staggering,” said Ken Jacobs, chair of UC Berkeley’s Center for Labor Research and Education and co-author of the report. “People who work in fast-food jobs are paid so little that having to rely on public assistance is the rule, rather than the exception, even for those working 40 hours or more a week.”

The study is being used to bolster the argument for an increase in the minimum wage at both the federal and state levels.

While proposals to raise the federal minimum wage appear unlikely to advance in the politically divided Congress, there’s a strong chance that the DFL-controlled House and Senate this session will approve an increase in Minnesota’s $6.15 minimum hourly wage – a rate that hasn’t been raised since 2005.

The federal minimum of $7.25 per hour kicks in for most Minnesota hourly workers employed by businesses that have at least $500,000 in annual receipts or are engaged in interstate commerce. An estimated 83,000 Minnesota hourly workers earn the federal minimum or less.

The Berkeley study found that front-line fast-food workers earn a median salary of $8.69 per hour and that 87 percent do not receive health-care benefits through their employer. Many also work less than 40 hours a week. “As a result, annual earnings in the fast-food industry are well below the income needed for self-sufficiency,” it said.

The study most likely understates the degree to which taxpayers subsidize low-wage workers. It was limited to the cost of four major public-assistance programs:  medical assistance, food stamps, Temporary Assistance to Needy Families and the Earned Income Tax Credit, a refundable credit to working people with low and moderate incomes.

It did not include the cost of housing assistance, child-care assistance, free school lunches and other programs also available to low income families.

Wages and public assistance connection

The Children’s Defense Fund of Minnesota has an online model that allows researchers and policymakers to examine the interaction between wages and public-assistance programs that provide a measure of economic stability for working families.

It shows that a family of four with two adults working 40 hours a week at the federal minimum wage would earn $30,160 a year. Various tax credits and public-assistance programs would boost that figure by about $10,600. (This does not include the cost of medical assistance, which would be another $19,440 a year, according to the Minnesota Department of Human Services.)

Such a family also would qualify for federal housing assistance of about $170 a month, although they might have a long wait. The Metro Housing and Redevelopment Authority, the largest in the state, provides federal housing vouchers to some 6,800 families. But the agency has a waiting list of 1,200 families with an estimate wait of seven to nine years, and it hasn’t even accepted applications since 2007. Other local agencies that administer federal housing vouchers have similar waiting lists.

Elaine Cunningham, director of the Bridge to Benefits program for the Children’s Defense Fund, says the public assistance available to the family of four described above does no more than fund what she calls a “bare bones budget.”  She says that budget does not include utilities not part of the family’s monthly rent, school expenses, entertainment, Internet or cellphone service, or debt payments.

Raising the state minimum wage to $9.50 an hour, as House DFLers propose, would provide nearly enough income for such family to make ends meet. The family no longer would be eligible for nutrition or housing assistance, would pay higher co-payments for child-care assistance and would receive smaller tax credits. (Senate DFLers last session resisted raising the hourly minimum above $7.75.)

Nan Madden, director of the Minnesota Budget Project, a liberal-leaning research and advocacy group, says raising the hourly minimum to $9.50 would reduce reliance on public assistance and promote greater self-reliance.

“It’s a strong societal value that if you work hard, you should be able to make ends meet,” Madden says. “That’s not the case for people who are working at these very low wages.”

Chamber of Commerce position

The Minnesota Chamber of Commerce and other business groups say they support raising the state’s minimum wage to the current $7.25 federal minimum, but they favor retaining a lower rate for workers under 18 and oppose the House idea of indexing the minimum wage to the rate of inflation (thereby providing for automatic increases in future years).

Bill Blazar, senior vice president of the chamber, acknowledges that the taxpayers may, in effect, be subsidizing businesses that have low-wage workers.

But he adds: “I think a lot of employers who are providing what are best characterized as entry-level jobs feel that they are actually doing a couple of things that are of long-term social benefit. They are introducing one generation after the next to the world of work. Most employers don’t want to hire someone who will always be a minimum wage person. They want somebody who is going to do a good job who will merit a better job at a higher wage, either that or the employee will go elsewhere.”

Blazar also is skeptical that raising the minimum wage will actually reduce the state’s current cost for public assistance programs. One reason is that raising the minimum wage could force employers to cut their workforce or the number of hours for some employees.

The nonpartisan Congressional Budget Office recently estimated that raising the federal minimum wage to $10.10 per hour would lift 900,000 families out of poverty, but also eliminate 500,000 jobs.

In addition, about a third of the state’s minimum-wage workers are in the 15-24 age bracket and many of them probably are not drawing  public assistance.

Business groups say they also fear raising Minnesota’s minimum wage above $7.25 would harm Minnesota’s competitive position with respect to its border states, all of which are at the federal minimum.

“If we go to $9.50 an hour, and our neighboring states stay at $7.25, you could see a lot of commerce move across the border,” says Dan McElroy, president of Hospitality Minnesota, which represents the state’s restaurant, lodging and resort industries. “ He says restaurant prices in Minnesota  already are 12 to 15 percent higher than in Wisconsin and North Dakota because this state does not include tips in the calculation of the minimum wage for servers.

Economist Arthur Rolnick supports raising the minimum wage if there are no other options, but his first choice would be to increase the Earned Income Tax Credit for low-wage families. “Raising the minimum wage costs jobs,” says Rolnick, former vice president for research at the Federal Reserve Bank of Minneapolis.  “The Earned Income Tax Credit provides incentives for businesses to hire more workers.”