The Unforeseen Negative Effects of Increasing Minimum Wage

By the end of 2018, New York and other states plan to raise the minimum wage to $15 an hour for fast food workers, and for all other industries by 2021. Given the high cost of living, how could a raise in the minimum working wage not be a good thing for the average employee?

Overlooking the On-Demand Economy

The “Gig” economy (or On-Demand economy) has driven a boom in independent contractor business models. These companies are thriving in part because, unlike businesses that classify their labor as W2 employees, they aren’t subject to government regulations requiring them to provide workers a minimum hourly wage, benefits, and other protections, including disability and workers compensation. Yet, in many situations, they still require workers to act like employees. For example, many of these businesses with huge independent contractor workforces impose terms on workers that require them to check in for a particular shift, complete training programs, maintain high customer approval ratings, and refuse tips. This lack of regulation on these business models substantially decreases their overhead of operating a large workforce.

Although a number of lawsuits surrounding such practices are in process, resolution by the courts will take many years. The only near term protections for workers in these businesses must come from state or federal legislatures. But legislatures have been very reluctant to provide protections for workers in the gig economy.

Mandating significant wage increases in W2-based businesses without mandating any comparable set of worker protections on competitors that rely only on independent contractors (1099s) tilts the game heavily in favor of the 1099 business. W2-based businesses could soon be forced out of the game altogether.

In other words, by only protecting the interests of employees in W2-based businesses, increases in minimum wage will substantially increase the operating costs of businesses that offer workers basic protections such as unemployment insurance and workers compensation. These operatings costs will be passed on in product or service offerings to customers, making the company less competitive than the independent contractor alternatives.

The Legislative Challenge

There are a number of reasons why legislatures have been slow to mandate protections for workers in the gig economy. Gig economy businesses are new, rapidly changing, and less understood by lawmakers than more traditionally organized businesses. Plus, workers in the gig economy are typically less organized than their W2 peers. Lastly, some of the larger gig economy businesses have mounted sophisticated political campaigns aimed at convincing legislators to give 1099 businesses every benefit of the doubt.

The reluctance of legislators to protect 1099 workers while simultaneously mandating significant benefits for workers in W2-based workforces will eliminate the competitive edge of those W2-based employers. Either that, or it will force them to change into independent contractor based models.

Once On-Demand economy companies are forced to correctly classify their workers, or similar protections are mandated for the 1099 workforces, any change to the minimum wage can be made without unduly favoring either W2 or independent contractor businesses.

However, if policymakers significantly raise minimum wage for W2 workers and continue to ignore companies that misclassify their employees as independent contractors, the good intention to improve the lives of workers will ensure that fewer and fewer people in the labor force enjoy basic protections that took centuries to develop.