Minimum Wage Indexing Costs Jobs

Original Article:

  • Author: Kristen Lopez Eastlick

  • Publication Date: January 2009

  • Newspaper: South Florida Sun-Sentinel and Lakeland Ledger

Small businesses across the country endured a hard year in 2008.

Northlake Foods, a company in Brandon that owned 90 Waffle House franchises in Florida, was forced to file for bankruptcy protection in September. While rising food expenses and declining sales were eating into the franchises’ bottom lines, it was the cost of labor that ultimately sank the business and put hundreds of people out of work.

In states such as Florida, where minimum wage is tied to the Consumer Price Index, small-business owners are really feeling the pinch – and will steadily continue to feel the pinch going forward. Starting Jan. 1, small business owners across the state again had to increase their wages, even though the economy was 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.

Floridian policies that tie the minimum wage to the CPI assume all parts of the state are experiencing the same economic strength and inflation rate. But people in Tallahassee may be sustaining more hardship than companies in Miami. 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 Florida 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. Research from the Miami University of Ohio and Florida State University shows that every year nearly two-thirds of minimum wage employees receive an increase in pay – a result of their increased skill level and experience, and their work effort. The vast majority doesn’t need a handout to get a raise.

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 poorest20 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. An inflated wage rate does comparatively little to support poor families, whereas the injuries such policies inflict on small businesses are immediate and undeniable.

Ever since Florida began indexing its minimum wage, its overall unemployment rate has been markedly higher than the unemployment rates in states that do not link the minimum wage to inflation. Between 2007 and 2008, the overall unemployment rate in Florida grew 2.1 times faster than the unemployment rate in noindexed states.

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.

Yet, amazingly, the average projected wage increase among all the states that have so far released their rates for 2009 is 5.14 percent. Compare that to last year, when the average increase among all 10 states and localities that raised their minimum wage was 2.75 percent. In today’s economic climate, that’s virtually unconscionable.

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.