Raising Colorado’s minimum wage could have some unintended consequences
Author: Kristen Lopez Eastlick
Publication Date: December 2008
Newspaper: Aspen Times
It’s been a hard year for owners of small businesses across the country.
In August, eight small-business owners filed suit to prevent Gov. Bill Ritter from enforcing Amendment 42, the legislation that has linked the minimum wage to inflation since 2006. The plaintiffs said because of the amendment, they’ve been forced to raise prices, decrease staff hours, lay off workers, and downsize or eliminate employee benefits altogether. So while there are many expenses that are eating into Colorado’s employers’ bottom lines in this tough economy, it is the cost of labor that is threatening to sink their businesses.
In states, like Colorado, 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 yet 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 profit margins 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.
Coloradoan 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 rural areas may be suffering more hardship than companies in Denver. 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 Colorado 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 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. An inflated wage rate does comparatively little to support poor families, whereas the injuries such policies inflict on small businesses are immediate and undeniable.
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 minimum wage. These artificial bumps are having a serious impact: Between 2007 and 2008, the overall unemployment rate in Colorado grew at a faster pace than the unemployment rate in states that don’t index. Here, unemployment went up by almost 25 percent — 1.3 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.
And 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.
Kristen Lopez Eastlick is the senior economic analyst at the Employment Policies Institute, a 501(c)3 nonprofit research organization dedicated to studying public policy issues surrounding employment growth.