State’s minimum wage reveals reality

  • Author: Kristen Lopez Eastlick

  • Publication Date: October 2009

  • Newspaper: Boulder Daily Camera

  • Topics: Minimum Wage, Teen Unemployment

Earlier this month the Colorado Department of Labor announced that the state minimum wage would be decreasing. While many jump to conclusions about such a decrease, the economic impact may actually be a positive one.

In the fall of 2006, Colorado voters approved a controversial ballot initiative that amended the state constitution to set the minimum wage at $6.85 and index it for inflation each year.

Proponents of indexing in Colorado, and in the 11 other states and localities that adopted similar labor policies, argued that wages of poor families were not keeping up with the cost of living. By raising the minimum wage and linking it to inflation during a time of rising prices, advocates planned on employee wages continuing to increase each year.

That was then; this is now. Since last year, the United States has experienced a general decrease in prices, otherwise known as deflation. The big question that loomed for wage-indexed states was, if employee wages go up to keep pace as prices are soaring, shouldn`t they also fall as prices do? Would proponents be consistent in their “cost of living” reasoning?

The answer we`ve heard, from a majority of the affected governments, has been a resounding “No.” Turns out, all but two of the laws — the exceptions are Colorado and Missouri — only allow the minimum wage to increase with inflation; if prices fall, the wage stays put. For employers who are seeking to survive in a slow economy, the law provides a “heads we win, tails you lose” dilemma.

Observers can be forgiven for viewing the situation with some cynicism. Indeed, when Colorado announced they would lower their minimum wage to follow the slight decrease in inflation, advocates were quick to embrace an argument based on emotion, not economics.

Typical was Rich Jones — the director of policy and research for a left-leaning Colorado think tank — when he said this about the 3-cent wage decrease: “It`s not a lot of money, but for people are who are working for the minimum wage, it means a lot to them.”

Lost in this discussion of the impact on workers is the equally important issue of jobs for those workers, and the employment consequences of government-mandated wage controls. Mr. Jones should consider the jobs lost and hours reduced from enacting a greater than 40-cent increase in the minimum wage in the first place.

Between 2007 and 2009, employers saw a 46 cent increase in the wage and tax cost to employ a minimum wage worker. A small business that employs 20 full time minimum wage workers had to cover more than $150,000 in additional labor costs since 2007.

When price increases are tough to pass on to consumers, employers are forced to cut positions and staff hours. In rare situations where jobs are not cut, employers shift their hiring focus to better skilled employees (whose skills are worth the higher rate) and automate services to reduce the number of employees they need. Remember — there was a time when pumping your own gas would have been unusual; we may soon say the same thing about ringing your own groceries.

In both cases, the young and least-skilled are left out of the labor market.

These adverse employment consequences have played out to painful effect in two other western states. Between 2003 and 2008, Oregon and Washington — both of whom indexed their minimum wage for inflation — saw an average yearly employment loss of 100,000 jobs.

Colorado has taken an important first step to lessen future consequences; by decreasing the minimum wage to account for inflation, they`ve shown a willingness to recognize economic realities.

Kristen Lopez Eastlick is the Senior Economic Analyst at the Employment Policies Institute, a nonprofit research organization dedicated to studying public policy issues surrounding entry-level employment.