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Minimum wage increases in 18 states put economic claims to the test

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Increases in minimum wage in 18 states at the start of 2018, mostly in left-leaning states, follow years of pushing by liberal activists for higher rates after similar efforts stalled in Congress. (iStock)

The minimum wage officially rose in 18 states with the start of the new year, in many cases far outpacing the federal minimum rate of $7.25 an hour.

The increases, mostly in left-leaning states, follow years of pushing by liberal activists for higher rates after similar efforts stalled in Congress. The increases, with more to follow later in the year, will make 2018 a major experiment in their impact on employment and the broader economy.

"A lot of eyes, including ours, will be watching to see what impact this has," said Ben Zipperer, an economist with the liberal nonprofit Economic Policy Institute. "The biggest question is: Does raising the minimum wage cause joblessness?"

Zipperer argues the evidence so far shows it does not, while conservatives and trade groups such as the National Restaurant Association and Chamber of Commerce argue that the increases will leave low-income workers worse off.

"Every employee deserves a fair wage. However, studies have shown that raising the minimum wage can have a negative impact on jobs. When states and localities drastically increase the cost of doing business, it may have an adverse effect on small businesses,” said Keith Stephenson, director of state and local government affairs at the National Restaurant Association.

Until recently, most minimum wage increases at the state and local levels were relatively marginal, limiting their impact and therefore what evidence could be drawn from them. But with rates in some areas such as New York City now rising to as high as $13 an hour, nearly double the federal minimum, those effects will start to become a lot clearer.

New York will have the highest rate in the nation, rising to $13 an hour for businesses that employ 11 or more people and $12 an hour for smaller businesses. Fast-food joints will have to pay $13.50. The rate will be $12 or $11.10 in the rest of the state, depending upon the region.

Washington state will have the next highest rate in the nation at $11.50 an hour. The rate will rise to $11 an hour in California, $10.50 in Arizona and Vermont, $10.20 in Colorado, $10.10 in Rhode Island and Hawaii, $10 in Maine, $9.84 in Alaska, up to $9.65 in Minnesota depending on the size of the business, $9.25 in Michigan, $8.85 in South Dakota, $8.60 in New Jersey, $8.30 in Montana and Ohio, $8.25 in Florida, and $7.85 in Missouri.

Other states have rate increases scheduled for later this year. Overall, 33 states and the District of Columbia now have rates exceeding the federal level. In the 17 remaining states, including large ones such as Texas, Virginia, and Pennsylvania, the rate remains the federal minimum.

That could result in some employers simply picking up and moving, says Michael Saltsman, executive director of the conservative Employment Policy Institute. "You are already seeing some of the relocation dynamic ... in places where the business is mobile, like a call center, or if it's near a neighboring state with lower rates," he said, citing a case where a New York business moved to Pennsylvania.

Saltsman conceded that for many businesses that employ people at minimum wage jobs, such as restaurants, relocation isn't an option. They will have to absorb the impact, which is leading to moves like a drive to change federal rules on tipping.

The Trump administration's Labor Department recently reopened federal regulations on tipping to public comment, a prerequisite before rewriting the rule. The restaurant industry has pushed to allow managers to redistribute the tips among employees, which is currently prohibited. The industry argues that in states with high minimum wages the disparity in earning between tipped jobs, such as waiting on tables or bartending, and non-tipped jobs, such as cooks and dishwashers, is causing major friction in the workforce. A decision by the administration is expected later this year.

Zipperer points to other potential effects of the increases in the minimum wage. "One of the things we are looking at is the impact on tipping behavior," he said. Will the rising rates cause customers to tip less because they will assume the workers are better off?

The increases come as a tight labor market drives up wages and benefits on its own. The national unemployment rate is currently 4.1 percent, down from 4.8 percent a year ago. Compensation costs for businesses increased 2.5 percent over the same period. That likely will mitigate any negative consequences tied to the higher rates, since they would be rising anyway.

Some of the initial studies of the higher minimum wages have suggested they harm more than they help. The University of Washington released a study last year of Seattle's increase to $13, part of an eventual phase-in to $15, as a working paper by the National Bureau of Economic Research. It found that the increase had sharply reduced wealth among low-wage workers due to job losses and reductions in hours worked. Businesses used both methods to mitigate the sharp increase in labor costs they faced.

"The lost income associated with the hours reductions exceeds the gain associated with the net wage increase of 3.1 percent," the study concluded. "We compute that the average low-wage employee was paid $1,897 per month. The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6 percent), which is sizable for a low-wage worker." The study found that payrolls for low-wage workers declined by an averaging 5.8 percent after the $13 rate went into effect, reducing those workers' income by $120 million.

The report caused consternation among the supporters of the higher rate. Emails obtained by the Seattle Weekly showed that then-Seattle Mayor Ed Murray, a key supporter of the increase, and his staff scrambled to publicize a revival economic report giving a rosier economic picture before the Bureau of Economic Research one came out.

On the other hand, in a September study the same University of Washington researchers found that Seattle's higher minimum wage did not increase consumer prices at grocery stores.