A plan to batter Rhode Island’s Economy

Original Article:

  • Author: Kristen Lopez Eastlick

  • Publication Date: June 2008

  • Newspaper: Providence Journal

  • Topics: Minimum Wage

Say you own a small-town bakery. One morning you see in the news that local legislators have passed a new regulation raising the cost of flour by a buck a pound every year.

What’s the first thing that you’d do to cut costs? Fire your worst-performing employees? Cut back on flour for your crowd-pleasing doughnuts? Move somewhere else? Start selling hamburgers?

Probably some combination of the above. Now, the Rhode Island legislature isn’t considering mandatory annual increases in the price of flour — same goes for steel, salt, or any other common good that local businesses need to make their products. Presumably that’s because lawmakers understand in theory what you, the hypothetical baker, recognize in practice: annual increases in the price of essential materials can hurt businesses — and, in turn, hurt the economy.
But when the question turns from the price of capital goods to the price of labor, some Rhode Island lawmakers think the rules of economics suddenly don’t apply.

Currently there is a push to tie Rhode Island’s minimum wage to specific economic indicators such as the Consumer Price Index. The hope behind such a provision — commonly called “indexing” — is that it will help minimum-wage workers keep up with inflation.

But forcing businesses to pay more for employees every year is going to have the same effect as forcing them to pay more for anything else: They’ll find alternatives (higher-skill workers, automation, outsourcing), spend less (firings, reduced hours), or move their business someplace else.

Want to make it worse? Throw in a soft or sinking economy. A robust economy can mask or even offset the effects of higher-wage mandates. But “robust” hardly describes our current situation. If ever there were a time for restraint on new labor-cost increases, it is now.

The May jobs report showed the largest increase in the unemployment rate in more than two decades. Commodity prices continue to drive up costs for businesses, while demand for their goods and services is dropping. The fact is, many Rhode Island employers are having enough trouble keeping the employees they currently have, without being forced by the government to the pay them more.

Moreover, raising the minimum wage isn’t even an efficient way to help low-income families that need a boost. The vast majority of people who benefit from minimum-wage increases aren’t living in poverty. Research out of Stanford University found that only 24 percent of the benefits from a minimum-wage hike go to the poorest 20 percent of families, while 35 percent of the benefits go to the richest 40 percent of families.

That’s not to mention that the subset of minimum-wage workers without the necessary skills to advance in the workforce are the ones who will get squeezed by the cost hike. Studies (and common sense) show that these low-skilled, less-educated workers are the first to get laid off when these mandated wage hikes put the clamp on businesses. Research from the University of Georgia, the University of Connecticut, and Cornell University indicates that increasing the minimum wage causes four times more job loss among employees without a high-school diploma than it does for the general population.

Rising prices are causing problems for many of our nation’s families, especially those in the low-income workforce. But no matter how bad the situation might be for some workers, an entry-level wage beats having no job at all.