By David Flemming & Rob Roper

THE MINIMUM WAGE: WHERE WE STAND NOW

In 2014, Vermont passed Act 176, which raised the minimum wage to $10 an hour for 2017, set it to increase to $10.50 on January 1, 2018[1], and on January 1, 2019 and each year after, the minimum wage will increase by the percentage increase of the Consumer Price Index, unless the CPI is greater than 5% (which has not happened since 1990), in which case the minimum wage will increase by  %.

Vermont is currently tied with Arizona for the sixth highest minimum wage in the US. However, there are several proposals for increasing the minimum wage in the Vermont House and Senate. The bill with the greatest support is House Bill 93/ Senate Bill 40, under which the minimum wage would increase $1 every January 1 from 2018 to 2021, and would increase by $1.50 in 2022, maxing out at $15 per hour.        If Vermont adopted a $15 minimum wage in 2022, we would be tied with California for the highest minimum wage in the country.

Of additional concern, were this to pass, Vermont would be far out of line with our New England neighbors. Maine has passed legislation that will increase its minimum wage to $12 by 2022, just 80% of what Vermont is proposing ($12 vs. $15). But this difference pales in comparison to New Hampshire, which is tied to the federal minimum wage of $7.25.

As the Vermont Joint Fiscal Office’s (JFO) April report states, the “pronounced and growing minimum wage rate differential with New Hampshire and other states at or near the Federal minimum wage of $7.25 represents a potential economic risk,” noting that this differential is “the largest historical spread on record.” How can Vermont compete to attract businesses with entry-level wages set at more than twice the rate of our neighbor?

THEORIES

Advocates argue that raising the minimum wage will directly help all workers who are currently earning less than $15 an hour, and benefit the economy in general. A $15 minimum wage would help lift those currently earning less than $15 per hour out of poverty by putting more money in their pockets – money they will spend in local businesses, boosting the overall economy.

“THE REAL MINIMUM WAGE WILL ALWAYS BE $O.”

Opponents of the $15 minimum wage argue that such an increase will hurt, rather than help, workers, employers, and the economy.

The higher cost for labor will discourage employers from hiring new workers, will cause them in some cases to cut back on hours for existing employees, and will cause them to discriminate against low skilled workers in favor of engaging fewer, higher skilled, more productive workers. Some businesses, unable to absorb the higher labor costs, will simply go out of business leaving all unemployed.

While an increased minimum wage might benefit a few, the overall impact is negative.

Luckily, some areas have begun implementing a $15 minimum wage, allowing Vermonters to learn from their experience.

WHAT THE STUDIES SHOW:

SEATTLE

Perhaps the most public experiment with the $15 minimum wage is taking place in Seattle, where the city is phasing in a $15 minimum wage for businesses ($9.47 to $11 per hour in 2015, to $13 in 2016, and to $15 per hour by 2021).

The University of Washington discovered that Seattle businesses adapted to the minimum wage increases by reducing the hours for workers in low-wage jobs ($13-$19/hr.) by about 9 percent, resulting in a loss of 14 million hours annually. Hourly wages in low-wage jobs did increase by 3 percent, but the net impact was that low-wage earners lost an average of $1,500 annually because of the cut in hours.

SAN FRANCISCO BAY AREA

A Harvard Business School study looked at restaurant closures in the San Francisco Bay area from 2008 (minimum wage: $9.36) to 2016 (minimum wage: $13). Here they concluded that for each $1 increase in the minimum wage the likelihood that a 3.5 star restaurant (the average rating on Yelp) would go out of business increased by 14% each month.

Without the $1 increase in the minimum wage, more San Francisco restaurants could have stayed in business, giving customers more choices and workers more  .

MACRO-IMPACT

Clemens and Wither (2014) looked at minimum wage increases across the US during the late 2000’s. Not only did they find workers losing income from an increase in unemployment short-term, they also noted that workers who lost their jobs from minimum wage increases were more likely to make lower wages in the long term because they had less experience.

“THE HARM DONE TO THE ECONOMY IS OF ENORMOUS MAGNITUDE, FAR SURPASSING THAT OF A HISTORICAL RECESSION.”

Meer and West (2013) show that a 10% permanent increase in the real minimum wage reduces job growth 0.3% annually. The harm done to the economy is of “enormous magnitude,” far surpassing that of any historical recession.

IMPACT ON SMALL BUSINESSES

A common sentiment in Vermont is that a $15 minimum wage “would give 85,000 Vermonters a raise.”

Unfortunately, this belief rests on the common misperception that employers are holding back wages from employees that they could easily pay for out of high profit margins. According to a 2013 Reason-Rupe poll, Americans thought that a business’ “percent profit on each dollar of sales” after taxes was 36%. The actual profit margin is closer to 6.5%.

“58.9% OF VERMONT PRIVATE SECTOR

EMPLOYEES WORK FOR A SMALL BUSINESS.”

Since labor costs generally make up 15-20% of a retailers’ total operating costs, even a a seemingly small increase in labor costs caused by a minimum wage increase could force a business to reduce hours, lay off workers, or close down entirely.

This a point of particular importance to Vermonters. As of 2012, Vermont had the fourth largest share of “Small Firm Employment” (up to 99 employees) in the US, with 58.9% of private sector employees working for a small business. In a 2013 Gallup poll of US small business owners, 60% of owners thought that “if a law was passed to increase the minimum wage” that it would “hurt small business owners.” Smaller businesses cannot absorb increases in labor costs as easily as large businesses, and since Vermont has such a large portion of small businesses, an increase in the minimum wage would be extra risky.

YOUTH EMPLOYMENT

A minimum wage law would disproportionately discriminate against those just entering the workforce. Younger workers have less experience than older workers, so they have fewer skills that employers can use to produce goods and services that customers would find valuable. While the Bureau of Labor Statistics (BLS) does not break down the numbers by state and month, 9.7% of US workers Age 16-19 earned at or below the minimum wage, compared to only 1.8% of US workers over 25 years old.

Neumark and Nizalova found that “as individuals reach their late 20’s, they earn less and may also work less the longer they were exposed to a higher minimum wage as a teen and young adult.”

“AS INDIVIDUALS REACH THEIR LATE 20’S, THEY EARN LESS AND MAY ALSO WORK LESS THE LONGER THEY ARE EXPOSED TO A HIGHER MINIMUM WAGE.”

(Gorry, 2013) Minimum wages account for a 2.8 percentage point increase in youth unemployment for high school educated workers between 2006 and 2010.

Gitis (2013) “in 2013, a $1 increase in the minimum wage was associated with a 1.48% increase in the unemployment rate, a 0.18% decrease in the net job growth rate and a a 4.67% increase in the teenage unemployment rate, and a 4.01% decrease in the teenage net job growth rate.”

Most minimum wage jobs are not dead-end jobs. There is room for advancement once workers prove themselves. Even and Macpherson (2000) remarked that “over the last 20 years, nearly two-thirds of minimum wage workers moved above the minimum wage within one year of working at the minimum wage.”

Employers cannot pay workers the minimum wage forever. Employees know that the skills that they acquired at low-paying jobs can be used as negotiating leverage to get higher paying jobs in the future.

According to Neumark and Wascher (2006), of the “33 studies (or entries) that we view as providing the most credible evidence; 28 (85 percent) of these point to negative employment effects.”

IMPACT ON OUT-MIGRATION

Monras, (2015) examines the effect that the minimum wage has on low-skill workers, or those who have a high school diploma or less. Unsurprisingly, the minimum wage leads to greater unemployment. The study goes a step further however, to show that low-skill workers tend “to leave or avoid moving to the regions that increase minimum wages.” The irony is apparent: the “workers for whom the policy was designed leave the states where the policy is implemented.”

This finding has serious implications for Vermont , which is trying to solve a stagnant population problem.

ROBOTS VS. WORKERS

A higher minimum wage makes the employment of workers more costly relative to emerging automated technologies. Supermarkets, airlines and restaurants have already begun automating their services, and increasing the minimum wage only serves to quicken the pace of automation.

Lordan and Neumark (2017) show that while the minimum wage tends to reduce the overall number of low-skill jobs available, some demographics are penalized far more than others. “The share in automatable employment declines most sharply for older workers.” Given that Vermont has some of the highest rates of elderly workers still in the workforce in the country, legislators would do well to keep these workers in mind as they consider a higher minimum wage.

As technology improves, the number of jobs that can be automated is increasing. A higher minimum wage will escalate the adoption of these technologies.

IMPACT ON POVERTY

While minimum wage increases are intended to benefit those in poverty, the real world impact demonstrates that the negative impact of higher minimum wages on the poor outweigh the benefits.

As noted in the Seattle study, the impact of a steeply rising minimum wage actually reduced overall income for low wage workers by an average of $1500 a year due to employers cutting back hours.

“A STEEPLY RISING MINIMUM WAGE REDUCED OVERALL INCOME FOR LOW WAGE WORKERS BY AN AVERAGE OF $1500 A YEAR.”

“Burkhauser, (2014) found that “The movement of families onto the poverty rolls because their wage earnings are negatively affected by minimum wage increases more than offsets the movement out of poverty of families whose wage earnings are positively affected.”

The Federal Reserve Bank of San Francisco noted that workers are poor not because of low wages, but because of low hours. Raising the minimum wage would not increase the number of hours an employer decides to give an employee to work. So long as an employer has the choice of how many hours to give an employee, an increase in the minimum wage incentives the employer to give them fewer hours.

Again, this is consistent with the University of Washington Seattle study, which concluded “the reduction in hours would cost the average employee (earning less than $19 an hour) $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%).”

CONCLUSIONS

Seattle’s median household income increased nearly $10,000 to $80,349 from 2014 to 2015, which was the largest increase of any of the 50 most populous cities in the US. If anyplace in the country was prepared to absorb a minimum wage increase with the lowest possible negative impact on employment, Seattle was it.

Vermont is not Seattle.

According to the Census 2015 American Community Survey, the only county in Vermont to have a median household income in excess of $60,000 is Chittenden, while Essex County has a median household income below $37,000, less than half of Seattle’s median household income.

We have seen how a $15 minimum wage can hurt workers in a robust economy like Seattle.  The challenges and potential impact are far greater for Vermont.

The Joint Fiscal Office found that “impacts associated with a $12.50 minimum wage include job losses of about 3,200 jobs.” A 2016 Heritage Foundation study predicts 11,000 full time jobs would be lost if Vermont were to raise the minimum wage to $15 by 2021. Since the current proposal would implement a full $15 minimum wage in 2022, this number might be a little lower because businesses would have more time to adjust. But not by much.

After St. Louis’ minimum wage increased from $7.70 to $10 back in May, small businesses immediately began cutting back their employees’ hours. Missouri lawmakers learned their lesson, and rescinded the increase. It is always better to learn from other people’s mistakes.

STUDIES AND LINKS

“Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle,” 2017
Ekaterina Jardim, Mark C. Long
https://ethanallen.org/wp-content/uploads/2017/06/Seattle-Minimum-Wage-Study.pdf

“Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit,” 2017
Dara Lee Luca, Michael Luca
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2951110%20

“Minimum Wage Effects in the Long Run,” 2004
David Neumark, Olena Nizalova
https://www.nber.org/papers/w10656.pdf

“Minimum Wages and Youth Unemployment,” 2013
Aspen Gorrya
https://www.sciencedirect.com/science/article/pii/S0014292113001104%20(

“How Minimum Wage Increased Unemployment and Reduced Job Creation in 2013,” 2014
Ben Gitis
https://www.americanactionforum.org/research/how-minimum-wage-increased-unemployment-and-reduced-job-creation-in-2013/#ixzz4qhWOlpsQ

“Rising above the Minimum Wage,” 2000
William Even, David Macpherson
https://www.researchgate.net/publication/234709506_Rising_above_the_Minimum_Wage

“The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers,” 2014
Jeffrey Clemens, Michael Wither
https://www.nber.org/papers/w20724?utm_campaign=ntw&utm_medium=email&utm_source=ntw%20

“Effects of the Minimum Wage on Employment Dynamics,” 2013
Jonathan Meer, Jeremy West
https://www.nber.org/papers/w19262.pdf%20

“Minimum Wages and Employment: A Review of the Evidence,” 2006
David Neumark, William Wascher
https://www.nber.org/papers/w12663.pdf

“Minimum Wages and Spatial Equilibrium: Theory and Evidence,” 2015
Joan Monras
https://www.columbia.edu/~jm3364/Minimum_Wage_and_Space.pdf

“People Versus Machines: The Impact of Minimum Wages on Automatable Jobs,” 2017
Grace Lordan, David Neumark
https://papers.nber.org/tmp/62829-w23667.pdf

“Why Minimum Wage Increases Are a Poor Way to Help the Working Poor,” 2014
Richard V. Burkhauser
https://ftp.iza.org/pp86.pdf

“Why Did the Target Efficiency of the Minimum Wage Increase in Recent Years?”
2014
Sam Lundstrom
https://www.esspri.uci.edu/files/news_events/2014/lundstrom-mw_tar_eff_16.pdf

“Reducing Poverty via Minimum Wages, Alternatives,” 2015
David Neumark
https://www.frbsf.org/economic-research/publications/economic-letter/2015/december/reducing-poverty-via-minimum-wages-tax-credit/

“How $15-per-Hour Minimum Starting Wages Would Affect Each State,” 2016
James Sherk
https://www.heritage.org/budget-and-spending/report/how-15-hour-minimum-starting-wages-would-affect-each-state#_ftn24