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For some, income drops as wage rises [Commentary]

It may be that some minimum wage earners would be harmed by an increase in the minimum wage because they would lose their jobs. But what about those who keep their jobs?

A more surprising result is this: Some minimum wage earners who keep their jobs would be harmed by an increase in the minimum wage because the dollar value of the government benefits they would lose is higher than their increase in wages.

This fact is illustrated by the Urban Institute's Net Income Calculator, which shows for various family configurations and income levels the "net income" — earnings after child care costs plus or minus the dollar value of taxes and subsidies — for the household.

Consider a single mother with three children (ages 2, 4 and 6) who works 40 hours per week at a minimum wage job.

She pays rent of $1,000 per month. Rent is included in the calculation of food stamp (formally, Supplemental Nutrition Assistance Program, or SNAP) benefits.

She incurs child care expenses of $600 per month. At very low income levels, child care expenses are reimbursed under the Child Care and Development Fund (CCDF). In our example, she receives no child support payments.

She lives in Maryland, where substantial increases in the minimum wage are under serious consideration.

At a minimum wage of $7.25 — the current level of the national minimum wage — her gross earnings are $1,256 per month. In addition to that $1,256, she receives money through the tax system, and receives benefits — vouchers which can only be used for specified purposes — from SNAP, WIC (Women, Infants, and Children nutrition program) TANF (temporary assistance for needy families), housing subsidies and CCDF. Her net income, after using her CCDF voucher to pay child care costs, is $2,912 per month.

Now suppose that a "living wage" proposal is adopted in her jurisdiction raising the minimum wage to $11.50 — as Montgomery and Prince George's counties have done. Her earnings increase to $1,991 per month. But her taxes increase (or her negative income tax benefits decline), and she loses TANF and CCDF benefits, so that her net income after paying for child care actually falls slightly to $2,830 per month.

So, after the 59 percent increase in the minimum wage, this minimum wage earner actually has less money to spend.

Health care costs are not included in these calculations. Because she lives in Maryland, which expanded Medicaid eligibility to 138 percent of the poverty line, she continues to qualify for Medicaid under the higher wage, and her health insurance costs do not change.

However, if she lived in a state which has not expanded Medicaid — Virginia is an example — she would lose Medicaid eligibility at the higher wage level as well, and her health care coverage would now cost her a small ($40-50 per month) premium and copays for doctor visits, so the decline in net income would be even greater. (Kaiser Permanente has a health care insurance cost calculator.)

This result — that an increase in minimum wage causes a reduction in net income — does not hold for all household types. But for poor households who do see an increase in net incomes, the increases are quite small relative to the increase in wage rate because of losses in benefits.

A single person with no children does not qualify for any of the listed government benefits even at the current minimum wage (working 40 hours a week), so the only impact of higher earnings is higher taxes. This individual would lose Medicaid, however. Instead of the free care under Medicaid this person would need to buy health insurance (assuming it is not provided by the employer). Taking medical care costs into account (and assuming $40 per month copays for doctor visits and prescription drugs), the 59 percent increase in minimum wage raises the person's net income after health care costs by only 2 percent.

The calculations here imply that the most important impact of living wage proposals is not a transfer of income from the employer to the employee, but from the employer to the government in the form of lower costs of government safety net programs.

Howard Leathers is an associate professor in the Department of Agricultural and Resource Economics at the University of Maryland, College Park. His email is hleathers@arec.umd.edu.

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