A Simple Question that Illustrates the Lie of a “Total Compensation” Minimum Wage

Sometimes a question can be as revealing as the answer.

In between sessions at yesterday’s Income Inequality Symposium, I was drawn into a discussion with fellow attendees about the “total compensation” minimum wage that some in the business community are still pushing. Under total compensation, an employer’s obligation to pay a minimum of $15 an hour could be met by a combination of cash wages, tips, and the cost of providing certain benefits. For example, I explained, $10.50 an hour in cash wages, plus $2.50 an hour in tips, plus $2 an hour in benefits would amount to a legal $15 an hour wage.

So if an employer were to offer a matching 401K contribution up to a maximum of one percent of an employee’s salary, I was asked, what would be the maximum benefit a minimum wage worker could receive? Would it be $0.15 an hour—one percent of the putative $15 an hour minimum wage? Would it be, using the example above, $0.105 an hour—one percent of the employee’s cash wages? Or would it be some more difficult to calculate number?

It took me a moment to wrap my mind around the question, but the answer I arrived at surprised even me. It doesn’t matter on which figure the employer chooses to calculate the maximum 401K match: under total compensation a matching 401K contribution is worth absolutely nothing to a minimum wage employee. Zero. Bupkes. Zilch.

And the same is true of the value of every other benefit.

Think about it. If you are earning a $15 total compensation minimum wage, and your employer generously matches your 401K contribution up to one percent of that higher number, you would receive $0.15 an hour in additional benefits. But that higher benefit could then be used to reduce the wage portion of your compensation by an equal amount. The benefit ends up costing the employer nothing, and the net result is that the “matching” contribution comes directly out of the employee’s paycheck. The employer gives with one hand and takes away with the other.

Likewise for other benefits like health insurance premiums and “paid” vacation days, the cost of which may also be used to decrease the wage component of your total compensation by an equal and offsetting amount. It’s as if minimum wage employees were purchasing these benefits through paycheck deductions; the employer bears none of the costs.

Some business owners argue that without total compensation they will be forced to eliminate benefits in order to shave costs. That may or may not be true. But from the minimum wage employee’s perspective, total compensation virtually guarantees the equivalent outcome. For when a benefit is transformed into a line item to be deducted from your take-home pay, it becomes nothing more than just another monthly expense. “Benefits” are no longer additive to one’s total compensation—eliminate them and your cash wages go up by a corresponding amount.

Of course, the caveat holds that all this analysis is only true of full-time employees. Lacking the cost of benefits to subtract from total compensation, low-wage part-timers and temporary workers could see their effective wage floor rise substantially.

But as a policy for raising the incomes of all low-wage workers, total compensation fails to deliver on its promise, while (for reasons I’ve explained previously) eroding the effective wage floor over time. A $15 total compensation minimum wage simply does not guarantee a $15 minimum wage. And to insist otherwise would be a lie.

Comments

  1. 1

    Big Boss spews:

    It’s even worse than that: As we have seen historically, pretty much anything can be listed as a “benefit”. Free coffee at work? Say goodbye to $0.10/hour. Heat? Air conditioning? Those are now “work benefits”, say goodbye to a quarter.

    Here, straight from the *ahem* horse’s mouth, the Heritage Foundation: http://www.heritage.org/resear.....g-together

    Note that at no point in that article do they explain what the “total compensation” IS, and, in fact, at one point essentially (go down to chart 6) effectively say that total comp tracks various productivity and inflation indices because… they must. Magical thinking. But writ large, what this article is really saying is that total compensation is more or less whatever the capitalist class claims it to be.

  2. 2

    Jack spews:

    So, if the wage were raised to $15 per hour,,would that mean employers would no longer provide payments into Social Security and other federal programs?

  3. 3

    Roger Rabbit spews:

    I suspect their real motive is to make the minimum wage law unenforceable.

    In any case, the “total compensation” concept is antithetical to the purpose of minimum wage laws, which is to assure that workers receive enough cash income to pay their living expenses. You can’t pay rent or buy food with a non-cash “benefit.”

  4. 4

    Better spews:

    @3. Is that like the republican meme of paying the doctor with a chicken? You think the doctor would take some “total compensation” work coffee? Or would the employee would just go to jail for stealing office supplies?

  5. 5

    Roger Rabbit spews:

    Minimum wage laws should be designed to put a floor under the cash income a worker receives; and, therefore, without exception should define the lowest cash wage the law allows.

    Social Security and other payroll taxes paid by the employer shouldn’t count toward satisfying the minimum wage requirement. Nor should paid leave or other benefits mandated by law, or any benefits voluntarily provided by the employer.

    If an employer wants to offer benefits over and above the required minimum wage as a competitive inducement to attract workers, fine. But these benefits should be in addition to, not come out of, the legally required minimum wage.

    A uniform minimum cash wage that all employers are required to pay is readily enforceable. All a federal or state labor department enforcement agent has to do is look at the employee’s pay stub to determine whether the minimum wage is being paid.

    On the other hand, if employers are allowed to satisfy the minimum wage requirement in whole or part with non-cash “benefits,” all sorts of creative-accounting games can be played; and employers who comply with the law would be at a competitive disadvantage to employers who succeed at reducing their labor costs by gaming the system. Enforcement would become much costlier and more complex, and as a practical matter be impossible.

    The “total compensation” argument is merely an attempt to avoid the minimum wage law, and doesn’t deserve the time of day. It should be a non-starter.

  6. 6

    Roger Rabbit spews:

    @4 Doctors likely would be taking chickens as payment for medical services if voters had elected Republicans to deal with the Great Recession.

  7. 7

    godwin spews:

    The vocal restauranteur that everyone knows and loves that is pushing this tripe is no more then a Neo-Con that has adapted to Seattle’s more liberal “social values”. In other words, a Libertarian. A Libertarian that called himself a “progressive, but.” Amazing how much hipsters love doublethink.

  8. 8

    Perfect Voter spews:

    I’m sure some businesses and non-profits will cut benefits, however defined, and put that money into hourly pay to meet the $15 minimum. Two steps forward, two steps back.

  9. 9

    spews:

    @8 I’m sure there. And I’m sure some businesses wouldn’t. And the former would be at a competitive disadvantage against the latter in attracting quality employees. Because markets!

  10. 11

    Perfect Voter spews:

    I know one non-profit director who could pay a $15 minimum wage, but that’s what her managers are now making. Management salaries would also have to go up, and that compounds the financial problem.

    Her question is, are her donors and government grantors going to increase their support rather substantially? or will she have to reduce service to her desperately poor clients?

  11. 12

    Kram spews:

    I guess my issue as a prior business owner is that it looks like these blanket laws seem to only hurt the small guys. The big companies will absorb it through higher costs and not hiring as much teens (WA is one of the lowest teen employers) but I had one full time employee, at the time $8.50ish an hour, who was a student and I was making about 50 grand a year. Where would the extra 10 grand come (to pay my fulltime student 15 an hour) from if this passes in my situation? I would have cut her to part time and took on more. I agree with the general idea I just think the young and small are the only ones hurt?

  12. 13

    Roger Rabbit spews:

    @11 Some non-profits function with volunteers. Others pay their help. Non-profits could be exempted from the minimum wage law. I’m not saying they should be. But that policy option exists.

  13. 14

    Perfect Voter spews:

    @13 the non-profit at issue already uses many volunteers, but it takes paid staff to manage all those volunteers!

    Please don’t assume that a non-profit can overcome a higher minimum wage by down-shifting to volunteers. And do we really want to encourage any enterprise to slash staff compensation from $10 to $0? If they can’t pay $15?

  14. 15

    ChefJoe spews:

    It’s rather sad that Roger Rabbit doesn’t recognize that min wage employees currently in a position that provides employer sponsored healthcare, retirement benefits, yearly performance bonus might be in a better position than an employee who finds all those benefits cut when their min wage raises to $15/hr.

    Maybe the employer will step up the hourly wage right away, but maybe they’ll cut those benefits first and decide if they can restore them later.

  15. 16

    Roger Rabbit spews:

    @14 A non-profit bears some resemblance to a group of neighbors or friends getting together to pursue a common goal, whether it be putting on a community picnic or organizing a youth sports league. Creating paying jobs, or getting paid for one’s time and effort, are not primary goals. At some point, a non-profit can morph into an employer-like organization, but there’s not a bright line, there are many gray areas. We can say, “if you pay at all, you must pay at least $10 [or $15],” or we can say, “if you’re a non-profit that meets certain criteria, you can compensate your volunteers at less than minimum wage, but you must pay full-time staff the minimum wage” — there are all sorts of policy options here. I’m not suggesting it be done. All I’m saying is there are policy options. These things are never simple. No matter what minimum wage rate you adopt, you still need a policy about unpaid interns, unpaid volunteers, etc., even if the policy simply says paying them isn’t required.

    In response to your question/hypothetical, if a non-profit is paying staff $10 an hour now, it’s unlikely they would “downshift” to $0, because if they could get by with unpaid volunteers they would already be doing that. You seem to be arguing that forcing them to raise staff compensation from $10 to $15 would cause them to go to $0. They have that option now, to the extent the law allows use of unpaid volunteers. What I’m saying is there’s a policy option to let non-profits keep paying $10 an hour while requiring for-profit employers to pay $15. I’m not saying do it, it’s just an option that can be considered as a possible answer to the issue you raise.

  16. 17

    Roger Rabbit spews:

    @15 Of all the bullshit arguments against raising the minimum wage that I’ve heard and read, yours is one of the bullshittier ones.

  17. 18

    Puddybud - The One The Only spews:

    If the Obummer economy was what Obummer/BiteME promised would we be having this discussion in this thread? Prolly not. So……… where is the hue and cry over the economic policies of the DUMMOCRETIN in da whitey house?

    $15/hr jobs are a short term fix for a long term problem. Obummer’s economic mess is making America worse and worse! Where are those promised manufacturing jobs? Obummer is still blocking Keystone Pipeline jobs and destroying the coal industry jobs. Fast food will be the only jobs left under Obummer!

    See ya DUMMOCRETINS!

  18. 19

    Roger Rabbit spews:

    @15 (continued) The simple answer to your stupid argument is that the employee you describe is not a minimum-wage employee.

  19. 20

    Roger Rabbit spews:

    @18 “where is the hue and cry over the economic policies of the DUMMOCRETIN in da whitey house?”

    Most people have enough sense to realize where we’d be if Republicans had succeeded in implementing their austerity policies.

    “Obummer is still blocking Keystone Pipeline jobs”

    Yeah, all 35 of ‘em.

    http://www.forbes.com/sites/en.....ystone-xl/

    As for the several thousand construction jobs the pipeline would create for a couple years, you could get way more than that, and for a lot longer, by passing the Infrastructure Bank legislation Republicans are blocking in Congress.

  20. 21

    Roger Rabbit spews:

    Don’t get me wrong, Puddy, we cherish you on this blog because without morons like you to kick around we’d be bored to death.

  21. 22

    Roger Rabbit spews:

    @18 “$15/hr jobs are a short term fix for a long term problem.”

    No, they’re a long term fix for people who can’t live on $10/hr.

  22. 23

    Kram spews:

    @19 calling my situation stupid? Awesome. Just trying to look at all situations and my past one would have been affected negatively. It seems you are so driven to defend $15 an hour that you can’t even admit to some of the failings of it. You make it seem like nobody gets hurt? There are many business owners just scrapping by, not everyone is a millionaire. It’s always a red flag when you can’t weigh both sides.
    I would guess you have never owned your own business, maybe you should interview some that have under 5 employees?
    Or don’t and just call me stupid, great way have a conversation about a touchy issue.

  23. 25

    Roger Rabbit spews:

    @23 “You make it seem like nobody gets hurt? There are many business owners just scrapping by, not everyone is a millionaire.”

    I suppose it’s asking too much for business owners to spell “scraping” correctly, if that’s what you meant. In any case, who gets hurt by a $10 minimum wage is the person who must try to live on that wage, and the taxpayers who foot the bill for housing subsidies, food assistance, daycare assistance, Medicaid, etc., when the minimum wage is less than minimum subsistence. Why should taxpayers support your labor costs? It must not be much of a business if you can’t pay $15/hr.

    “I would guess you have never owned your own business …?”

    Wrong again. I started a business from scratch that grew to 35 full-time employees, and I currently own a business I bought. But then maybe that doesn’t count, by your reckoning, if I’m a millionaire.

    I say I’m not, but it all depends on how you put a dollar value on my assets and what you count. The readily quantifiable stuff — home equity and stocks — fall short of $1 million. If you arbitrarily assume my business is worth 15 times the income it produces, we’re almost there but I think still a bit short. If you count the present value of future pension income using standard actuarial methodology and a normalized interest rate, that clearly puts my net worth over $1 million. So, being a millionaire business owner, I don’t sweat paying my workers $15 an hour, they already get that.

  24. 26

    Scott spews:

    These problems seem rather trivial to avoid. You could easily require some minimum cash wage and tie that to inflation. Likewise you could cap the amount that could go to anyone one thing like tips or medical, and not count trivial benefits at all.

    I don’t see what’s wrong with allowing employers the flexibility to convert a few dollars an hour to benefits.

  25. 27

    Kram spews:

    @25 Fair enough, and again, I’m not against raising the minimum wage, in fact I’m for it! I just HATE the argument that business owners can afford it, so do it. If that’s the logic, then why 15, go 20?
    The bar and restaurant industry really gets the shit end, it’s one of the smallest profit margin industries in existence.
    I’m only trying to make one single solitary point; the very very small guy gets hurt by this. The large guys will absorb it (raise costs a small %), fast food guys will expedite automation and the small bar owner who has a take home of under 50 grand a year gets screwed. Ask as many as you’d like. It used to be me. Is there a way to improve the life of the very poor, yes, but is a blanket arbitrary number the answer with no exceptions and not listening to the other side? I personally don’t think so.

  26. 28

    Roger Rabbit spews:

    @27 “I just HATE the argument that business owners can afford it, so do it.”

    As this is opponents’ leading argument, it’s hard to avoid discussing this issue; and if it’s fair for business owners to argue they can’t afford it, then it’s fair for supporters to argue they can.

    The reality is that most businesses pass cost increases to customers by raising prices; but price elasticity varies, so a higher minimum wage will impact some businesses more than others. It might even put some marginal enterprises out of business, but that’s true of all business costs, not just wages.

    But why should affordability to business be the test? That’s a factor unrelated to the purpose of a minimum wage law, which is to ensure workers a living wage. “Affordability” isn’t even quantifiable, and varies among businesses, so how could you even develop a rationale wage rate from such a test? Cost of living, on the other hand, is determinable and can be standardized.

    Finally, because it is the business owner, not the worker, who controls prices, it is the business owner and not the worker who should be expected to conform to what the community has determined to be an appropriate wage standard.

    “If that’s the logic, then why 15, go 20?”

    What’s the logic of injecting $20 into a discussion of $15? If I offer an hour of my labor for $15, why are you complaining that $20 is too much?

    There are lots of ways to respond to this tack: Off topic, red herring, dishonest, etc. It’s the bumper-sticker argument of the anti-minimum wage crowd who can’t think of anything intelligent to say.

  27. 29

    Roger Rabbit spews:

    When you get down to it, the dispute over minimum wage laws pits two drastically different philosophies against each other.

    On one side are people trying to solve a practical problem (wages too low to live on).

    On the other side are people who believe that market forces are always the best mechanism for determining supply, demand, prices, wages, etc., and governments should never intervene in markets because doing so creates market distortions.

    For example, price controls cause shortages because they disrupt the pricing mechanism that brings supply and demand into balance. If Seattle were to implement rent controls, rents would be lower, but you wouldn’t be able to get an apartment because demand would permanently exceed supply.

    When I was a young bunny, I fell in with a conservative crowd partly because there’s a superficial appeal to conservatives’ black-and-white way of thinking about the world. It didn’t last, because I quickly learned that the real world exists in shades of gray.

    Free markets are a wonderful concept. The problem is, they don’t always work. Market mechanisms can and do fail; and when they do, they’re not always self-restoring. Think of a car with a dead battery: It won’t recharge itself, and unless you kick start it, or hook it up to a battery charger, the car will sit there dead as a doornail until the end of time.
    In real life, an economy mire in depression can do the same thing, i.e. it may stay that way until government intervention is used to jump-start it.

    Supply and demand mechanisms can fail, as when a monopolist gains enough control over supply to destroy the market’s competitive pricing mechanism. Market excesses can bring the entire economy down if they get out of control for lack of regulation.

    I like the traffic law analogy here. If we had no traffic rules, and no traffic cops to enforce them, our streets would be chaotic; accident rates would soar; and no one could get anywhere. We’d all be caught in permanent gridlock, shooting at each other with our handguns. Having and enforcing traffic rules allows congested traffic to flow as smoothly as possible for a given amount of traffic and street capacity.

    It’s pretty clear to me that conservative economic arguments look much better on paper than they work in real life. Anyone can compare objective economic data from the last 100 years and readily see that the stock market does better, there is more job creation and lower unemployment, higher GDP growth, and everyone is generally better off, when Democrats run things than when Republicans do.

    Another problem with approaching an issue like minimum wage with arguments based on pure economic theory is this approach overlooks the reality that not everything in life is, or should be, determined by economic values.

    For example, I remember riding a bus in the ’60s and some guy told me we couldn’t afford to end the Vietnam War because we needed the jobs the war created. This guy was completely oblivious to the fact people were dying in the war every day it continued. In fact, one of the biggest problems of the Vietnam War is that families in the upper half of the income scale were granted exemption from compulsory military service, so it was mostly kids from poorer families who were fighting and dying in Southeast Asia, and the middle class didn’t give a damn about those kids as long as the war didn’t take their kids. The student deferment policy kept the war going for years past the point where public pressure otherwise would have ended it.

    It’s easy to prattle about how a $15 minimum wage will “hurt” businesses if you’re not the one who has to live on $10 an hour and you’re one of those empathy-deficient people whose values totally center around money and they don’t give a damn if low wage workers can’t pay rent or buy food. That may be you, but it’s not me.

    We know from historical experience what some humans are capable of, if the rest of us don’t impose some rules on them. They’re capable of mass murder. They’re capable of enslaving their fellow human beings and forcing them to work for nothing. They’re even capable of fighting a bloody war to preserve the institution of slavery. The need is clear to put certain values above the profit motive and enforce those values through societal rule-making.

    “If that’s the logic, then why 15, go 20?”

    Because if $15 solves the problem we’re trying to solve, there’s no need to go further in interfering with market pricing of labor, that’s why. Those of us who support a $15 minimum wage are willing to live with the market distortions it would bring because I’d rather live with that problem than make people who work full-time live with the problem of being unable to live on their earnings.

    The logic of $15 instead of $20, my friend, is that $15 is a living wage, and a living wage is what we’re after, so there’s no need to force a $20 minimum wage on businesses.

    Will a $15 minimum wage destroy some jobs? Yeah, it might, economic theory says it will. So let’s destroy as few jobs as necessary to assure a living wage to those who work, by keeping the societally-mandated minimum wage as low as we can consistent with the objective of assuring all of our adult workers a living wage.

    I’m not ignoring economics. I recognize this interferes with the market. Even though I’m a Democratic party hack and liberal propagandist, my willingness to do that goes only so far. I would not support a rent control ordinance. Nor would I support a $20 minimum wage initiative. The $15 is a compromise, a middle ground, something that reasonable people can live with so that other people don’t have to live in poverty, or be supported by our tax dollars, and it’s a pragmatic tradeoff. The logic behind it is pragmatism.

    It won’t work for absolutely everyone — it won’t be enough for some workers, and it’ll be too much for some businesses — but it’s what will work best for the greatest number on both sides. It balances the needs of workers and business owners in a reasonable fashion in an imperfect world. That’s the answer to your question.

  28. 30

    Lack Thereof spews:

    min wage employees currently in a position that provides employer sponsored healthcare, retirement benefits, yearly performance bonus

    I’ll give you the healthcare part, since that’s now federally mandated, but as for the rest….

    HA HA HA HA HA HA HA