PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The States and the Feds: Minimum Wage Update

By at 1 February, 2019, 5:45 pm

by Raymond J. Keating-

SBE Council’s Small Business Policy Index 2018 ranks the 50 states according to 55 different policy measures, including a wide array of tax, regulatory and government spending and performance measurements. Among the regulatory measures is the minimum wage mandate, specifically, which states impose a minimum wage mandate higher than the federal mandate.

While a higher minimum wage often plays well politically, it’s one of the few issues upon which most economists agree, specifically, that the minimum wage reduces job opportunities for young, inexperienced, low-skilled workers. Worker pay is based on productivity, and market supply and demand. Government cannot simply wave a wand and raise pay without consequences. For example, the minimum wage provides a clear incentive to eliminate positions through shifting of job responsibilities and making investments in labor-saving automation. So, the people that a minimum wage is supposed to help, it instead winds up hurting.

For good measure, small, labor-intensive businesses suffer additionally, and must find other savings, such as rolling back fringe benefits, reducing profitability (with many businesses already operating on thin margins), cutting pay for other workers, or raising prices, which can make them uncompetitive.

States Increasing the Minimum Wage

At the start of 2019, a stunning 19 states (and 23 localities) increased their state minimum wage – Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Jersey, New York, Ohio, Rhode Island, South Dakota, Vermont and the state of Washington.

There also are legislative initiatives to further raise state minimum wages in various places across the country, including in New Mexico and Texas. And a deal was struck in New Jersey, between the state’s Democratic governor and legislators, to further raise that state’s minimum wage to $15 in 2024. (The state’s current minimum wage of $8.85 will rise to $10 on July 1.) In Florida, voters may also be voting on a ballot initiative in 2020 to raise the minimum wage to $15.

But why stop at $15? This past December, at hotels across Southern California, striking workers were demanding a $25 minimum wage.

Economic Sanity in Virginia

There’s at least one positive piece of good news for small businesses from the states. On January 21, the Virginia Senate defeated a measure that would have hiked Virginia’s minimum wage from the federal level of $7.25 to $15.00 per hour by mid-2021.

U.S. Congress Considering a Minimum Wage Increase

For good measure, Democrats in the U.S. House of Representatives are looking to increase the federal minimum wage, with legislation introduced (e.g., Raise the Wage Act, H.R. 582, S.150) that would raise the mandate from $7.25 to and eventual $15.00 in 2024, with automatic increases thereafter.

On February 7th, a hearing is scheduled for the U.S. House Education and Labor Committee titled: “Gradually Raising the Minimum Wage to $15: Good for Workers, Good for Businesses, and Good for the Economy.”

The Minimum Wage and Inflation

For those who say that the federal minimum wage has failed to keep up with inflation, they are dead wrong. In reality, the federal minimum wage in real terms is much higher today compared to when it was first imposed in October 1938. When adjusting for inflation, the 1938 real minimum wage would be worth $4.49 today. That compares to the actual federal minimum wage of $7.25. So, growth in the federal minimum wage has run far in excess of inflation – increasing by 61 percent in real terms.

Big Costs to Small Businesses

Raising the minimum wage has real consequences for entrepreneurship and the survival of many different types of small businesses. Mandated wage hikes also reduce employment and drive prices higher for consumers.

Allowing businesses to set wage rates based on skills and experience, competition in the market for labor, local costs and individual negotiations between the entrepreneur and worker serve both best, and will allow resources to be utilized and deployed in their most efficient way especially for cash-strapped small businesses.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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