How a boost in the minimum wage may end up doing more for corporations than for low-paid workers

March 29, 2013
March 29, 2013

This piece has been corrected.

New York state just passed its $1.35 billion budget, bumping up the minimum wage to $8.00 from $7.25, and raising it incrementally each year. Good news for low-wage workers, right? In fact, it’s a classic example of how well-intentioned provisions might have unintended consequences.

Included in the budget was a measure to encourage small businesses to keep young student workers on their payroll. It subsidizes the minimum wage for them via a tax credit (pdf, p. 59). If businesses pay minimum wage to workers aged 16-19, they receive a refundable tax credit for the difference of the latest wage increase.

“The minimum wage/teen tax credit was a compromise we believed was necessary to protect businesses,” Scott Reif, a spokesman for Senate Republican Leader Dean Skelos of Long Island, told the New York Post.

The trouble is, for workers over 19, there’s no tax credit. So that gives companies a strong incentive to hire teens for low-wage positions that would otherwise be filled by adults, and even to replace current adults workers with teens. Since adults currently make up around 90% of New York’s low-wage workforce, that’s potentially a lot of money companies can save.

What’s worse, the provision rewards only companies that pay exactly minimum wage. So even teen workers whose wages are subsidized could get screwed, because this encourages companies to slash wages of the 54% of teenage workers (pdf, p.4) who were making more than $8.00 an hour as of 2011.

Moreover, the law is supposedly aimed at small businesses. But they aren’t the primary beneficiaries, says James Parrott, an economist at the Fiscal Policy Institute (FPI). “The biggest employers of low-wage workers [are] likely to include discount retail chains like Wal-Mart and fast food chains like McDonald’s and Yum Brands,” he told Quartz.

Which is why the final unintended consequence is that this subsidy could cost the state—i.e., taxpayers—much more than it was meant to.

Preliminary estimates from the state governor’s office put the total cost at $35 million in 2014, jumping to $63 million in 2015 and $66 million the next two years. Parrott says that “[We can't yet] quantify the overall impact” but that next year the tax credit will cost taxpayers $1,560 per full-time teenage worker, jumping to $2,808 in 2016-18. If the FPI is right, the governor’s estimates of the total cost imply around 22,000-23,000 full-time student workers.

Yet last year, New York had nearly 160,000 full-time teenage workers (pdf, p. 4) making around $8.00 an hour. Subsidizing the minimum wage for them all would cost just shy of $250 million in 2014, instead of $35 million. And that number could grow further if companies start replacing adult workers with teenagers.

Why is the governor’s estimate so low? It might be, says Parrott, because not many of the companies eligible for the tax credit are expected to take it up. But, he argues, when the main beneficiaries are big firms like Wal-Mart that stand to save millions of dollars in taxes, that’s a risky assumption.

In short, a law designed to help minimum-wage workers earn a little more money may merely end up impoverishing a lot of other workers while padding big companies’ profits. Not the best outcome. Neither governor Andrew Cuomo’s office nor the office of state senator Jeffrey Klein, the Democratic co-leader and a sponsor of the tax credit provision, responded to requests for comment.

Correction (March 29, 11:52 a.m.) This piece has been corrected to reflect that the current governor of New York is Andrew, not Mario, Cuomo. It also originally described the tax credit as a “deduction.” It’s actually a tax credit that is refundable if the business otherwise does not owe any taxes.

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