Think the Minimum Wage Increase Doesn't Affect You? Think Again

Posted by John Regan on Jan 6, 2014 8:58:00 AM

Supporters and opponents of increasing the minimum wage in Massachusetts agree on one thing – the ramifications extend well beyond companies that currently pay the $8-per-hour minimum and the workers who earn that amount.

The Senate bill boosting the state minimum wage to $11 per hour over the next three years would provide an average pay increase of $2,573 to 491,900 Massachusetts workers who currently earn between $8 and $11 per hour. It would indirectly push up wages by an average of $727 for an additional 317,200 workers because of union contracts linked to the minimum wage and general upward pressure on wages.

That comes to a total tab of $1.5 billion for Massachusetts employers.

Those aren’t our numbers – they come from a study by the Economic Policy Institute and reported by the Massachusetts Budget and Policy Center, a left-leaning think tank that strongly supports the minimum-wage increase. From the employer point of view, the research raises the specter of massive wage compression in which newer and lesser skilled workers suddenly earn as much as more experienced employees who are providing value to an organization.

The lesson – raising the minimum wage will affect your company and your compensation plan even if you have no workers within sight of $8 per hour.

“Employers who pay more than minimum wage tend to ignore the potential effects of an increase,” said Gary MacDonald, Executive Vice President of the Employers Resource Group at Associated Industries of Massachusetts.

“But the Senate proposal to move to $11 per hour and index it to inflation thereafter will affect more than three quarters of a million employees, most of whom currently earn more than minimum.”

The Senate passed its version of a minimum-wage increase on November 19 in the face of opposition from AIM and other business groups.

Legislative leaders had indicated earlier in the year that they would consider tying the minimum wage increase to substantive reform of the commonwealth’s outdated Unemployment Insurance system. House Speaker Robert DeLeo continues to suggest that he will link the two issues when his chamber debates the minimum wage in the next several weeks.

“In addition to the minimum wage, I think maybe we have to change some of the burdens that businesses presently face in Massachusetts,” House Speaker Robert DeLeo told the State House News Service on October 29.

Advocates are also seeking to place a minimum-wage increase to $10.50 per hour on the 2014 statewide ballot.

The push on minimum wage comes as Massachusetts employers plan to increase overall wages and salaries by an average of 2.96 percent during 2014, a rate that would finally surpass the levels that were in place prior to the Great Recession. The AIM Human Resource Practices Survey, set for release this week, finds that projected raises for next year continue a trend that has seen salary growth climb from a low of 1.7 percent in 2009 to 2.1 percent in 2010, 2.4 percent in 2011, 2.55 percent in 2012 and 2.8 percent this year.

Wage compression from minimum wage increases causes multiple problems for employers. It can erode morale among workers as existing employees become angry that newer or lower-skilled colleagues are making nearly as much or, in some cases, more than they are. That anger can in turn accelerate turnover as the result of employees quitting.

Companies will be forced to address the problem by adjusting their entire compensation systems, usually upward and across-the-board.  The adjustments will include salary ranges, which are developed by setting range widths (difference between minimum and maximum) and relationships between range midpoints.

AIM opposes increasing the minimum wage because the action misses the real reason that many of our fellow citizens struggle to achieve an adequate standard of living - lack of appropriate training for the high-value jobs driving the state economy.

A market-based economy provides financial compensation to employees according to their ability to contribute to the success and profitability of the organization. That’s why AIM has for decades supported education reform, school-to-work initiatives, increased opportunities for training, community-college-based training initiatives, tax credits for training, and funding for the Massachusetts Workforce Training Fund.

Increasing the minimum wage has the perverse effect of limiting opportunity for young and lower-skilled workers and pushing jobs out of the market. Far from helping poor people, moving the minimum wage to $11 an hour will simply ensure that people whose skills do not justify that wage will not find jobs.

The more targeted approach to assist families is through the Earned Income Tax Credit (EITC), a credit currently set at 15 percent of the amount of the federal credit in Massachusetts.  These sole earners derive greater economic benefit from the combined state and federal EITC.  Because the EITC does not have a correspondingly negative impact on job creation and business costs, AIM has supported this approach rather than simply raising the minimum wage, or here simply indexing the wage to CPI.

Topics: Minimum Wage, Massachusetts Legislature, Unemployment insurance

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