Download White paper on minimum wage increase

White Paper on Potential Impacts from Raising the Minimum Wage
Prepared for Public Policy Council
Green Bay Area Chamber of Commerce
February 21, 2014
Issue
Both the Federal Government and the State of Wisconsin are considering legislation that would
raise the Minimum Wage Rates for low-wage workers. President Obama has in fact recently,
through Executive Order, increased the minimum wage rate on all future federal contracts. The
President continues to promote with Congress, an increase of the minimum wage rate for all
Federal Workers. It is likely that the President could again increase the minimum wage rate for
all Federal workers through an additional Executive Order, if Congress does not act.
Legislative Democrats have, likewise, proposed legislation to increase the Minimum Wage Rate
in Wisconsin. 2013 Assembly Bill AB 686 is currently under review by the Assembly Labor
Committee and SB 505 is under review by the Senate Committee on Judiciary and Labor.
While the issue is highly political, the question of how a minimum wage affects employment
issues and the economy continues to be studied and debated. It is one of the most
controversial topics in labor economics.
It is anticipated that the Public Policy Council (PPC) will be asked to provide input on this
proposed legislation. A committee was formed by the PPC to research and identify the potential
impacts from raising the minimum wage. The committee primarily reviewed the following four
documents:
Paper 1- Meer, J. and West, J. (December 2013) Effects of the Minimum Wage on Employment
Dynamics. Working Paper, Texas A&M University and National Bureau of Economic research
(NBER)
Paper 2- Cooper, D. and Hall, D. (March 2013) Raising the Federal Minimum Wage to $10.10
Would Give Working Families, and the Overall Economy, A Much-Needed Boost. Economic
Policy Institute
Paper 3- Congressional Budget Office, (February 2014) The Effects of a Minimum-Wage
Increase on Employment and Family Income.
Paper 4- Department of Workforce Development, (March 2011) Historical Resume of Minimum
Wage Regulations in Wisconsin.
The results of the research will be provided below. It should be noted, unless it is critical in
conveying the potential impact, the paper will not discriminate between the impacts resulting
from either the Federal legislation or State legislation and will consider them as a single event.
The paper will also not identify the research result as either pros or cons but will leave that to
the reader. Reference to the paper will be provided for each comment.
Background
The first Wisconsin wage law was enacted in 1913 and specified that a “living wage” must be
paid to women and minors. The original law was modified and updated numerous times
between 1913 and 1975 at which time the minimum wage law was changed from “women” to
include adult men. While there are numerous rates in the current law, depending on the
individual employee’s job description, the actual base minimum wage rate has increased from
the first rate of $0.22 per hour in 1919 to the current rate of $7.25.
In 2007, Congress increased the minimum wage for all employees covered by the Fair Labor
Standards Act (FLSA). This applied to all enterprises with annual sales of $500,000 or more, as
well as all employees who engage in interstate commerce – regardless of the size of their
employer. The first step in the increase went into effect on July 24, 2007, when the minimum
wage increased from $5.15 to $5.85. The second step ($6.55) went into effect on July 24, 2008,
and the third step ($7.25) took effect on July 24, 2009.
For information purposes, the following is a graphic showing the minimum wage laws in the
United States:
Source: http://www.dol.gov/whd/minwage/america.htm
While there are a number of possible rate increase scenarios under consideration, the proposed
legislation in Wisconsin is to raise the current rate to $8.20 per hour upon enactment of the new
law with an annual increase of $0.95 per hour for each of the following two years to $10.10 per
hour. The law would also adjust the rate based on the consumer price index (CPI) in future
years.
Research Summary
The effects resulting from the raising of the minimum wage are as follows:
1. A minimum wage has two opposing effects on employment: it reduces demand for new
workers by raising the marginal cost of an employee and it induces additional search
effort from unemployed workers. The additional search effort, however, does not
overcome the higher labor costs, thereby, negatively impacting net job growth. It is
estimated that a 10% increase to the minimum wage results in a reduction of
approximately 25% of the net job growth rate. (Paper 1)
2. Increasing the federal minimum wage to $10.10 by July 1, 2016, would affect the wages
of about 30 million workers (644,000 in Wisconsin). (Paper 2)
3. GDP would increase by roughly 32.6 billion resulting in the creation of approximately
140,000 net new jobs. (Paper 2)
4. Employees who would see wage increases include (Paper 2):
a. 56% women
b. 88 % at least 20 years old
c. 54% non-Hispanic white workers
d. 44% would have some college education
e. 55% work full-time
f. 70% are in families with income less than $60,000 and nearly a quarter have
total family income of less than $20,000.
g. Average affected worker earns half of family income
5. If the minimum wage had expanded at the same rate as the average workers wage, it
would be $10.50 per hour today. (Paper 2)
6. Increasing minimum wage would have two principal effects on low-wage workers: most
would see an increase in family income and some would see family income rise above
the federal poverty threshold and, secondly, some would see their jobs eliminated.
(Paper 3)
7. There would be a reduction in total employment by about 500,000 workers. (Paper 3)
8. About 16.5 million low-wage workers would have higher earnings during an average
week. (Paper 3)
9. Increasing the federal minimum wage would affect the federal budget by increasing
wages paid to hourly employees and indirectly by boosting the cost of goods and
services purchased by the government. (Paper 3)
10. Workers with increased earnings would pay more in taxes and potentially receive less in
certain federal benefits. (Paper 3)
11. People who became jobless due to rate increase, business owners, and consumers
facing higher prices would see a reduction in real income and would collectively pay less
in taxes and receive more federal benefits. (Paper 3)