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Don't Increase Minimum Wage in Middle of the Year

Posted by Brad MacDougall on May 20, 2014 1:55:00 PM

There are sound economic reasons not to raise the minimum wage in Massachusetts.

Minimum WageThere are even sounder reasons to avoid doing so in the middle of most employers’ fiscal year.

Both chambers of the Massachusetts legislature recently passed bills to boost the commonwealth’s $8 per hour minimum wage – the House to $10.50 over three years and the Senate to $11 over three years and then indexed to inflation. The two proposals agree on one point – the minimum wage would take its first step up from $8 to $9 per hour on July 1, giving employers less than a month to budget for a change that will affect hundreds of thousands of employees.

Tipped employees currently earning $2.63 per hour would see that amount increase to $3.75 per hour over three years under the House bill and $5.50 per hour under the Senate version.

A House/Senate conference committee will hammer out the differences, but few expect a final vote to send the measure to Governor Deval Patrick until close to – or even after – July 1. The proposed $8 to $9 increase would raise the wages of an estimated 284,000 people at a total cost of $201 million.

“The clear solution, should the Legislature decide to increase the minimum wage, is to have the increase take effect on January 1, 2015. It’s patently unfair to ask employers to change their entire compensation budgets midway through the year,” said John Regan, Executive Vice President of Associated Industries of Massachusetts.

The minimum wage would rise to $10 an hour on July 1, 2015, and $11 an hour indexed starting July 1, 2016 under the Senate bill, while the House bill would increase the level to $10 per hour on July 1, 2015 and $10.50 on July 1, 2016. The minimum wage in Massachusetts last increased to $8 an hour in January 2008.

The Economic Policy Institute estimates that an $11 per hour minimum wage 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. 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.

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 but acknowledges that supporters have the votes to pass such a measure. Employers remain concerned about the action because it 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.

Supporters of raising the minimum wage are seeking to place a question on the November statewide ballot the ballot that would bring the wage to $10.50 in January 2016. Tipped wages would climb to 60 percent of the minimum wage.

Topics: Compensation, Minimum Wage, Massachusetts Legislature

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