Maine’s High Minimum Wage May Be Doing More Harm Than Good

  • Author: Kristen Lopez Eastlick

  • Publication Date: December 2009

  • Newspaper: Morning Sentinel

  • Topics: Minimum Wage, Teen Unemployment

Health-care reform may be grabbing most of the headlines these days, but the unemployment crisis is the No. 1 issue for more than 15 million Americans looking for work.

With the national jobless rate now in double digits, a growing consensus that the recession is over is cold comfort for families scraping by on savings and unemployment checks.

Maine residents, who have seen their state unemployment rate increase by 43 percent over the last year, know this as well as anyone.

In response to such worries, Gov. John Baldacci will hold a state “jobs summit” in January to brainstorm job creation strategies with small business owners and retailers.

Before policymakers in Maine charge headlong into their own expensive job creation plan, they might start by undoing the mess they’ve created with recent spikes in the minimum wage.

In October, Maine’s minimum wage increased to $7.50
per hour, making it the 10th highest in the nation after Jan. 1) and 25 cents higher than the federal rate. This increase — implemented this fall as unemployment was creeping ever higher — came at a particularly damaging time for Maine’s entry-level work force.

In passing the higher wage, well-intentioned politicians hoped this policy would benefit the state’s low-income workers and give earners access to good paying jobs and a bright future. But decades of research, and recent economic realities, show the opposite is true: Wage increases make it harder to find employment for the most vulnerable job seekers.
How is it that a higher minimum wage would hurt the low-wage work force?

It’s the law of unintended consequences. The minimum wage affects employers who largely hire from the entry-level workforce. October’s wage increase of 25 cents per hour translates to $10,000 in annual costs for a business with 20 minimum-wage employees — on top of the $10,000 imposed 12 months earlier. Businesses with small profit margins will need to increase sales by hundreds of thousands of dollars to recoup those higher costs.

When businesses can’t offset costs by increasing sales — especially difficult in today’s economy — they find other ways to cut their budget: by eliminating jobs or reducing employee hours. Even if jobs are not cut, companies respond to higher labor costs by shifting their hiring focus to higher skilled employees whose productivity and lower training costs can match the higher salaries. This move effectively shuts unskilled workers out of the labor market.

And in the Small Business Council’s 2009 Small Business Survival Index, released this week, Maine ranked 46th worst out of 50 states and the District of Columbia. The state minimum wage, 10th highest in the nation, was one of the factors considered in the report.

Maine’s policymakers need to learn that good intentions don’t outweigh economic realities. The evidence is clear: economists consistently find that minimum wage increases are an ineffective — and even harmful — way to help the working poor.

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. For more information, visit the Web site: www.epionline.org.