Indexed wages slam businesses
Author: Kristen Lopez Eastlick
Publication Date: December 2008
Newspaper: Arizona Daily Star
It’s been a hard year for owners of small businesses across the country. A car salesman in Arizona told Reuters that the economy has almost completely dried up sales at the dealership where he worked until he recently lost his job. Todd Gerardo, of Gilbert, said his layoff was not entirely unexpected. “The economy is just so bad that for the first time in my life I just wasn’t selling any cars,” Mr. Gerardo said. “The business is just not there anymore.”
In states, like Arizona, where minimum wage is tied to the Consumer Price Index (CPI), small business owners are really feeling the pinch — and will steadily continue to feel the pinch going forward. Come Jan. 1, small business owners across the state will again have to increase their wages even though the economy is in the toilet.
Minimum wage proponents argue that people have to come before profits. But when so many small businesses operate with razor-slim profits to begin with, those companies that are forced to pay their low-skilled employees a premium are faced with two options: drive up prices and make their products less competitive, or shut down completely. And no one profits from a shuttered storefront.
Arizona-like policies that tie the minimum wage to the CPI assume all parts of the state are experiencing the same economic strength and inflation rate. Not only that, but the CPI routinely overestimates the inflation rate by more than 1 percent. The net effect of indexing is that negative economic effects become concentrated in areas of Arizona that need the biggest leg up. And it’s a problem that cripples small businesses.
Additionally, such minimum wage mandates take as a given that employees earning that wage are improving in productivity at the same rate as the economy grows. But how likely is that to be the case? Productive, skilled employees would find themselves recognized through promotions and raises over time.
Politically popular increases to the minimum wage are touted as help for the poor and support for low-income families. Yet only 24 percent of the benefits from a minimum wage hike go to the poorest 20 percent of families. Why? Because an overwhelming 80 percent of the people who earn minimum wage are teenagers who live with their parents, or else they are not the primary breadwinner.
As unemployment rates rise across the nation, states should be looking at ways to keep people in jobs, instead of worsening the problem by inflating the minimum wage. These artificial bumps are having a serious impact: Between 2007 and 2008, the overall unemployment rate in Arizona grew at a faster pace than the unemployment rate in states that don’t index. Here, unemployment went up by 28.9 percent — 1.5 times the increase in non-indexing states, which averaged 19.4 percent.
It’s clear how state policies that enforce indexing have the same unfortunate effects as any other minimum wage mandates: growing unemployment and a minimal impact on poverty levels.
Legislators need to be wary of implementing legislation when the economy is booming that will have negative unintended consequences down the line. What we need are policies that support small business owners and keep America employed. Blindly inflating the minimum wage, regardless of how the economy is doing, is not the right solution.