Businesses can’t afford an increase in minimum wage
Author: Kristen Lopez Eastlick
Publication Date: February 2009
Newspaper: Sheboygan Press
Topics: Minimum Wage
It’s a new economic reality in Wisconsin, and as the Legislature reconvenes, a minimum wage hike proposed for June is currently up for debate. But lawmakers should tread carefully: If history is any guide, inflating the wage rate is a move that will serve only to weaken small businesses and cause entry-level workers to lose their jobs.
Increasing the minimum wage from $6.50 to $7.60 an hour, and indexing the wage to inflation thereafter, may not seem like a big deal during ordinary economic times. But this 17 percent increase will come at a time that Wisconsin businesses and families can least afford it. A small business with 20 employees at or near the minimum wage will have its labor costs increase by $45,000 next year alone.
As the cost of food skyrockets and people are struggling to hold on to their jobs or find a new one, Wisconsin lawmakers, with all good intentions, are seeking a solution. But with a wage hike, they will only find unintended consequences.
If Senate members consulted research by the University of California-Irvine, they would see that artificially increasing the minimum wage has repeatedly put vulnerable workers on the fast track to unemployment. For every 10 percent increase in the minimum wage, the research estimates, jobs for high school dropouts, young black adults, and teenagers can disappear at a rate of 8.5 percent.
Minimum wage proponents argue that people have to come before profits, and point to rising living costs behind the need for higher wages. What those lobbyists don’t realize is that so many small businesses operate with razor-thin profits to begin with. Companies that are forced to pay their low-skilled employees a premium are faced with few options: drive up prices, reduce employee hours or cut some of the services they provide. It’s an unending cycle of making the cost of living more expensive and putting unskilled workers out of a job.
Worse still, once the wage is indexed, the problems stemming from this autopilot law will only grow over time. A policy that links the minimum wage to the Consumer Price Index (CPI) assumes all parts of the state are experiencing the same economic strength and inflation rate. But businesses in Milwaukee, for example, may be faring worse than companies in Madison. Adding to indexing imperfection is the fact that the CPI routinely overestimates the inflation rate by more than one percent. The ultimate effect of indexing may be that negative economic effects will become concentrated in areas of Wisconsin that need the most help.
Luckily, there is still hope for low-income families.
Wisconsin’s Earned Income Tax Credit gives a tax break to workers near the poverty level. It puts money back into the pockets of those who need it the most. In fact, responding to a 2007 survey from the American Economic Association at the University of New Hampshire Survey Center, 70 percent of labor economists said that expanding the Earned Income Tax Credit would lead to employment gains.
The same survey says that 73 percent of labor economists believe increases in the minimum wage will lead to employment losses, which will fall disproportionately on the least skilled workers. So expanding the Earned Income Tax Credit is clearly a better way to help the working poor without the unintended consequences.
The Legislature must not add to the problems with a reckless, autopilot wage hike and vote down Senate Bill 1 or else many entry-level employees throughout the state are going to experience those unintended consequences first hand — by losing their jobs.
About the author: Kristen Lopez Eastlick is the senior economic analyst at the Employment Policies Institute, a nonprofit research organization based in Wasington, D.C that studies public policy issues surrounding employment growth.