As Nov. 8 approaches and Maine voters begin to familiarize themselves with the ballot questions, it’s worth digging deeper into Question 4, the plan to increase the minimum wage to $12 an hour, tie it permanently to inflation and phase out the tip credit for service employees. Though much could be written about the dangers of all three of these provisions, the potential impact of linking – or “indexing” – the minimum wage to inflation should be particularly concerning to voters going to the polls.
Under the proposal, the minimum wage would increase every Jan. 1 to reflect the percentage change in the Consumer Price Index, a statistic that tracks changes in the cost of living. Using inflation projections calculated by the Congressional Budget Office, Maine’s minimum wage would reach $15 an hour in 2030.
Supporters of indexing argue that the provision is necessary to prevent the purchasing power of the minimum wage from eroding over time. “Inflation indexing guarantees low-wage workers a wage that keeps pace with the rising costs of goods and services and provides a sustainable solution to the problem of declining real wages for the lowest-paid workers,” wrote the Maine People’s Alliance in 2012.
However, as the Employment Policies Institute pointed out in a 2009 report, “indexing puts into motion an unending cycle of rising labor costs and reduced job growth, the annual disappearance of job opportunities for entry-level workers, and constant pressure on prices.”
Despite its intuitive appeal, indexing would severely exacerbate the minimum wage’s detrimental effects. Given costly capital investment and transition costs, businesses may be reluctant to dramatically change their workforce and production methods in response to a nominal minimum-wage increase under the expectation that such an increase will gradually be eroded by inflation.
A small business is unlikely to invest in expensive automation to replace low-skilled workers if the impact of a minimum-wage increase will wane after a few years. On the other hand, if companies think they will have to cope with higher minimum wages over the long term, they will be more willing to adjust their operations, especially their labor forces, in response to the increase. Businesses’ decisions to enter or exit the market will also be influenced by the prospect of permanently higher labor costs.
A seminal study by the American Enterprise Institute, whose results were released in February, found that “the disemployment effect of indexing minimum wages to inflation is over 2.5 times the magnitude of the disemployment effect associated with nominal minimum wage increases” in the restaurant industry.
According to economists at Miami University and Trinity University, a nominal increase in the minimum wage could cause a loss of up to 4,191 jobs among full-service restaurants in Maine. Indexing the wage would potentially lead to a total of 10,478 restaurant jobs lost.
Indexing the minimum wage to inflation could have particularly devastating consequences during recessions, when low-skilled workers have the hardest time finding or retaining employment.
While the rate of inflation tends to fall in response to economic downturns, the Consumer Price Index consistently reported positive inflation rates in the aftermath of the financial crisis. As economists from the Federal Reserve noted in 2013, “inflation remained remarkably stable in the face of serious economic weakness over the last five years.”
Raising the minimum wage in the midst of upheaval in the business sector is a recipe for significant job losses, an experience familiar to several states that indexed their minimum wage before the 2008 economic crisis nationwide.
In Oregon – which indexed its minimum wage in 2002 – unemployment grew from 5.2 percent in December 2007 to 9 percent in December 2008, a 72 percent spike that exceeded the national trend in job loss by more than 25 percent. Florida, which indexed its minimum wage in 2004, saw an equally high rise in unemployment during the same 12-month period. Examining the experiences of these states confirms that indexing can have significant effects on employment, especially during economic downturns.
The Employment Policies Institute warns that “no matter how attractive it may be to index the minimum wage while the economy is booming, setting wages to go up automatically inevitably leads to calamitous results when the economy softens.”
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