Minimum Wage Impacts on Workers Compensation

Posted Date: September 04, 2018
    

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Thumbnail By John Deacon, FCAS, MAAA

Recently, some states have implemented minimum wage increases, and there has been discussion about increasing the federal minimum wage. In this article, we examine changes to minimum wage levels and the potential impacts on workers compensation (WC) stakeholders and NCCI ratemaking.

In 2017, 2.3% of hourly paid workers earned the federal minimum wage or less, and 58.3% of all workers over age 16 were paid hourly1. Therefore, minimum wage workers comprise less than 2% of all workers on a countrywide basis. The share of hourly paid workers earning the minimum wage varies significantly by industry and occupation.

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Food Preparation and Serving occupations have more minimum wage earners than all other occupation groups. In fact, more than half of minimum wage workers are in Food Preparation and Serving occupations.

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The definition of minimum wage worker does not address pay from tips or overtime, and there are many legitimate reasons why a worker could earn less than the minimum. Some workers (e.g., food servers) would not be directly affected by an increase in minimum wage since their wages, including tips, would likely be higher than the minimum.

NCCI classification codes for restaurants (9082 and 9083) are likely to address some food preparation and restaurant workers earning the minimum wage. Based on policies effective in 2016, we estimate that these class codes comprise approximately 3% of payroll and standard premium across all classes and NCCI states2. Note, however, that only a portion of this payroll and premium would be associated with minimum wage workers.

For 2018, 18 states (and some individual cities) increased their minimum wage3. Currently, 29 states plus the District of Columbia have a minimum wage that is higher than the federal minimum of $7.25, ranging from $7.50 to $12.504. The US Department of Labor publishes an interactive map of the United States and each states’ minimum wage compared to the federal minimum wage5. If the federal minimum wage were to increase, but remain lower than that for some states, then stakeholders in those states would be generally unaffected.

Next, we analyze how a minimum wage increase (federal or state-specific) would impact the following WC stakeholders:

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Workers earning between the current minimum wage and an increased minimum wage would receive an increase in their hourly pay rate. Workers earning just above the new minimum wage may also see an increase in their pay rate, as determined by their employer and not otherwise required by law, as some employers may seek to maintain pay-equity amongst their employees.

Injured workers earning at or near the minimum wage would receive greater WC wage-replacement (indemnity) benefits after a work-related injury than they would have before a minimum wage increase. However, many states have minimum weekly benefit provisions that may mitigate an increase in benefits from a minimum wage change.

The employment effect after a minimum wage increase is unclear, however. One overview of minimum wage changes around the United States showed no adverse employment effects6, but another recent paper7 found significant negative employment effects in Seattle, WA, after a large minimum wage increase. Most evidence shows that the magnitude of any reduced employment or reduction in hours worked is smaller than the increase in wages, but the magnitude of the employment impact may depend on the magnitude of the minimum wage increase.

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Given an increase in pay for minimum wage workers (and assuming small employment effects), the employers of minimum wage workers would face an increase in WC premiums, because payroll is a direct input into premium calculations.

Depending on how financially impactful the labor costs and WC premium changes may be on their overall expenses, employers may adapt by reconsidering: i) workflows, ii) workforce, iii) hours worked, iv) prices for goods and services, or v) other aspects of their business. For employers with few minimum wage workers, the impacts may be minor. The impact on total payroll for a given employer of minimum wage workers may reflect offsetting effects from a potential decrease in staffing (or hours worked) and the increase in the minimum wage itself.

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For insurers, the wage increase would likely result in higher indemnity benefit costs and premiums for those affected policyholders. Premium audits after policy expiration would address premium changes due from any payroll changes occurring after policy premium was initially calculated and paid.

Apart from those insurers focused on industries with high concentrations of minimum wage workers, it is likely that most insurers would not necessarily notice the impacts, since the share of minimum wage workers is low overall.

Changes in minimum wage levels impact NCCI ratemaking as well, although the impacts are expected to be minimal.

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Historically, NCCI has not explicitly adjusted loss costs or rates after changes to a state or federal minimum wage. Since the share of payroll and benefits from minimum wage employees is low, the impact of small changes in the minimum wage is generally expected to be low on a statewide level. The impact of increasing the minimum wage is expected to vary by class code, but the impacts are uncertain due, in part, to potential offsetting changes in employment or hours worked.

After a minimum wage change, the payroll and loss data for policies subject to the new level is reported to NCCI. Any impact on loss costs and rates would then be reflected in future NCCI filings that rely on that data.

Conclusion

A minimum wage change would increase wages and wage-replacement benefits for injured minimum-wage workers. Employers of minimum wage workers would incur increased labor costs and WC premiums, unless they adapt by reducing staffing levels. Insurers would see higher benefit costs with offsetting impacts on the bottom line due to higher premiums. On a statewide level and even for the job classes with the highest shares of minimum wage workers, the impacts on WC would be minimal due to the relatively low share of minimum wage workers to all workers.

1 Bureau of Labor Statistics. Characteristics of Minimum Wage Workers. (March 2018) www.bls.gov/opub/reports/minimum-wage/2017/home.htm

2 NCCI Unit Statistical data. States include: AK, AL, AR, AZ, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MD, ME, MO, MS, MT, NC, NE, NH, NM, NV, OK, OR, RI, SC, SD, TN, TX, UT, VA, VT, and WV

3 Jones, Janelle. December 21, 2017. Economic Policy Institute. www.epi.org/publication/18-states-will-increase-their-minimum-wages-on-january-1-benefitting-4-5-million-workers/

4 US Department of Labor. Consolidated Minimum Wage Table. Retrieved on May 29, 2018, from www.dol.gov/whd/minwage/mw-consolidated.htm

5 US Department of Labor. Minimum Wage Laws in the States. www.dol.gov/whd/minwage/america.htm

6 Jardim, Ekaterina, et al. “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence From Seattle.” No. w23532. National Bureau of Economic Research, 2017.

7 Dube, Arindrajit, T. William Lester, and Michael Reich. “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties.” The Review of Economics and Statistics, 92.4 (2010): 945–964