RIPEC: Proposed increase in minimum wage ‘relatively modest’

Note: The following is the February 7, 2016 written testimony provided to the RI House Finance Committee by John Simmons, executive director of the Rhode Island Public Expenditure Council (RIPEC). It is filled with scare tactics and poor economics. For context, see any of the “articles in this series” linked at the bottom of this post.

See also the links below provided by economist Douglas Hall who notes that “despite what your favorite Chamber of Commerce lobbyist might have you believe, the sky is not falling.”

Raise the Minimum Wage

Arin Dube, at UMass Amherst

Economic Policy Institute

Center on Economic and Policy Research

When Simmons gets into the various news organization and think tank produced “State Rankings” he’s engaging with the ultimate in crank economics. These rankings are ideological statements and little more. See: Grading Places: What Do the Business Climate Rankings Really Tell Us? for more on this.

Dear Chairman [Marvin] Abney:

RIPEC executive director John Simmons

On behalf of the Rhode Island Public Expenditure Council (RIPEC), I would like to provide testimony regarding Article 20 of the Governor’s FY 2018 budget proposal. This proposed budget article would increase the state’s hourly minimum wage from $9.60 to $10.50 as of October 1, 2017.

If the proposal is adopted, it would mean that Rhode Island has increased the minimum wage for five consecutive calendar years, from $7.75 per hour on January 1, 2013 to the proposed $10.50 on October 1, 2017. In percentage terms, this would amount to a 35.5 percent increase in just over five years.

Before adopting this policy, RIPEC urges legislators to carefully consider potential economic impacts that may result from increasing the minimum wage by another $0.90. A number of studies have sought to estimate the economic impacts of increasing the minimum wage, but findings are mixed. A number of researchers have concluded that increasing the minimum wage produces a number of negative consequences, such as reduced employment for low-wage workers and rising consumer prices; other researchers, however, have come to the opposite conclusion, finding no negative impact on employment or prices.

Especially in light of these conflicting findings, it is important for any economic impact analysis to take into account the particular and unique characteristics of the Rhode Island economy. And, there are reasons to believe that Rhode Island’s economy and recovery since the Great Recession may be especially vulnerable to the negative impacts associated with increasing the state’s minimum wage.

First, the vast majority of firms in Rhode Island are small businesses. According to March 2016 data from the Rhode Island Department of Labor and Training, 81.6 percent of firms in Rhode Island employ fewer than ten workers, and 90.1 percent of firms employ fewer than 20 workers. In general, small businesses are more likely to be negatively impacted by increasing the minimum wage than larger companies. As the well-documented positive relationship between employer size and wages demonstrates, small businesses tend to rely more heavily on lower-wage employees. Raising the minimum wage therefore disproportionately impacts small businesses, especially once the “ripple effect” is taken into account. In other words, increasing the minimum wage often triggers a wage increase for workers who earn slightly above the minimum threshold as well, thereby increasing the cost of a large portion of the small business workforce.

Small companies are also less able to absorb rising labor costs than larger enterprises. Many family-run businesses in the state barely bring in enough money to get by month to month; they are also less likely to have cash reserves or access to capital that may help them get by in the short term as they adjust to the rising cost of doing business. Therefore, RIPEC strongly urges the state to carefully consider the implications of raising the minimum wage for small businesses. Otherwise, a policy that is intended to help one disadvantaged group (minimum wage earners) may ultimately end up harming a second group that is also already struggling economically (small business owners).

A second reason Rhode Island’s economy may be especially vulnerable to the negative impacts associated with raising the minimum wage has to do with the particular industries that drive economic growth in the state. When measured in terms of employment, the Ocean State’s fastest growing industries are Administrative & Waste Services (a subsector of Professional Business Services) and Leisure & Hospitality, which grew by 27.9 and 24.0 percent, respectively, since the height of the recession in August 2009. (RIPEC calculations based on RI DLT Establishment Employment Tables for August 2009 and December 2016) Together , these two industries account for nearly half (49.9 percent) of Rhode Island’s total increase in employment between August 2009 and December 2016 (the most recent month for which data is available.) These two industries also employ a large number of low-wage employees – according to the Rhode Island Department of Labor and Training’s 2015 Employmnt and Wage Analysis, both industries had average annual wages that fell substantially below the statewide private sector average, with Leisure and Hospitalty especially likely to be hurt by increasing the cost of low-wage labor. In other words, increasing the minimum wage threatens to stifle Rhode Island’s two fastest growing industry sectors. Therefore, RIPEC urges policymakers to consider how slower (or even negative) growth in these industries might impact Rhode Island’s economy as a whole before adopting a higher minimum wage.

Raising the state minimum wage could also reduce Rhode Island’s competitiveness relative to other states, making it a less attractive place to start, grow or relocate a business. According to the Wage and Hour division of the US Department of Labor, 29 states have adopted a state minimum wage that exceeds the federal rate (7.25 per hour) as of January 2017. Among those 29 states, Rhode Island’s current rate of $9.60 per hour ranks the tenth highest. If the state’s rate is increased to $10.50 as proposed, Rhode Island would be tied with California for third highest nationally (after Massachusetts and Washington, which would be tied for first at $11.00 per hour.) The proposal would also make Rhode Island’s minimum wage the second highest in New England, followed by Connecticut ($10.10), Vermont ($10.00), Maine ($9.00)  and New Hampshire ($7.25, set to equal the federal rate).

Even at the proposed rate of $10.50, the minimum wage in Rhode Island would remain lower than the minimum wage in Massachusetts. However, the cost of labor is only aspect of a state’s business climate; any comparative analysis of the minimum wage should take into account broader economic conditions and the overall business climate in each state. A number of indices exist that seek to measure states’ overarching business climate, and Rhode Island consistently ranks among the ten worst performing states nationally. Massachusetts, on the other hand, substantially outperforms Rhode Island and is much closer to the middle of the pack nationally. For example, on the Tax Foundation’s 2017 State Business Tax Climate Index, Rhode Island ranked 44th (compare to 27th in Massachusetts); on CNBC’s 2016 Top States for Business index, Rhode Island ranked 50th (compare to 20th in Massachusetts); and on Forbes 2016 Best States for Business Index, Rhode Island ranked 42nd (compared to 19th in Massachusetts). Currently, Rhode Island’s relatively lower cost of labor is a comparative advantage for the state. Increasing the minimum wage would ultimately reduce or eliminate that comparative advantage, and could undermine efforts by policymakers to improve Rhode Island’s broader business climate and economy.

Finally, RIPEC urges members of the General Assembly to consider whether increasing the minimum wage is the most efficient or effective way to achieve the goals of reducing poverty and helping low-income families. To the extent that raising the minimum wage results in job losses and rising consumer prices (as some researchers suggest), the policy may end up hurting the very workers it is intended to assist. Furthermore, it is unclear how effective the $0.90 increase will be in reducing poverty in the state. Not all minimum wage earners support a family on that income or live in poverty – many are teenagers attempting to gain work experience, or individuals looking to supplement other sources of income. (See, for example, the 2014 study by the Congressional Budget Office) For families that do live in poverty, it is unclear whether the relatively modest increase in income would be enough to make a difference in their standard of living. On the other hand, it is possible that the modest increase could actually make some low-income families worse off, depending on the structure of various public welfare programs in the state and where cliff effects are (that is, the drop in public supports that occurs when earnings increase). (For discussion of cliff effects, see here for example.)

In light of these uncertainties, RIPEC strongly urges policymakers to conduct a more in-depth cost-benefit analysis before proceeding with raising the minimum wage as proposed in Article 20. As part of that analysis, RIPEC also recommends that policymakers consider other, more targeted ways of reducing poverty and providing assistance to low-income families in the Ocean State. Existing research demonstrates that other policy options are more effective at reducing poverty, incentivizing work, and targeting low-income workers than minimum wage, without some of the associated negative impacts to businesses and the economy. Examples of these policies include increasing the Earned Income Tax Credit, which RIPEC has supported in the past, and reducing the cost of childcare to enable more parents to remain in the workforce.

Thank you Mr. Chairman,


John Simmons

Executive Director

Rhode Island Public Expenditure Council

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