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Minimum Wage Deal Moves Minnesota Forward

April 08, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

The minimum wage compromise announced yesterday will allow Minnesota workers' wages to catch up with the rising costs of goods and to keep up in future years by indexing that wage to growth in the cost of living. The compromise contains important concessions to business groups while still accomplishing fair and reasonable reforms to the state’s minimum wage.

The minimum wage compromise was amended on to House File (HF) 2091 and heard in the Senate Finance Committee. Some of the specifics of the minimum wage agreement include:

  • Two separate minimum wage rates. The first applies to employees of “large employers,” defined as businesses with gross sales over $500,000. The minimum wage of these employees is $8.00 per hour beginning August 1, 2014, increasing to $9.00 on August 1, 2015 and to $9.50 on August 1, 2016. The minimum wages for employees of small employers, employees under age 18, employees under age 20 for the first 90 days of employment, and employees holding a non-immigrant visa is $6.50 per hour beginning August 1, 2014, increasing to $7.25 on August 1, 2015 and to $7.75 on August 1, 2016.
  • Beginning on January 1, 2018 and on January 1 of each subsequent year, the $9.50 and $7.75 minimum wages will be increased annually by the lesser of (1) growth in the cost of living as measured by the implicit price deflator for personal consumption or (2) 2.5 percent.
  • The Commissioner of Labor and Industry is given authority to suspend annual minimum wage increases after 2017 if he determines that—based on leading economic indicators and after a hearing and public testimony—there is “the potential for a substantial downturn in the state’s economy.”

Yesterday’s agreement contains several concessions to address concerns raised by opponents of the original minimum wage proposal. First—as noted above—the compromise establishes a separate lower minimum wage for several categories of employees, including youths and those employed by small businesses.

Second, the minimum wage is indexed to the Implicit Price Deflator for Personal Consumption (IPD-PC), as opposed to the Consumer Price Index (CPI). As noted in a recent Hindsight Post, the IPD-PC typically grows less rapidly than the CPI. For example, over the last decade (2003 to 2013) the IPD-PC grew by 22.4 percent, compared to 26.6 percent for the CPI. Over the next decade (2013 to 2023) the IPD-PC is projected to grow by 17.7 percent, compared to 20.0 percent for the CPI. By indexing to the IPD-PC instead of the CPI as originally proposed, the minimum wage will likely grow more slowly over time.

Third, the indexing of the minimum wage is delayed until 2018, which will effectively reduce the minimum wage by approximately 1.6 percent (based on current IPD-PC projections) each year going forward.

Fourth, the annual rate of growth in the minimum wage is capped at 2.5 percent, even if inflation as measured by the IPD-PC grows more rapidly than 2.5 percent (which it is not projected to do for the foreseeable future). In effect, if the cost of living grows rapidly, much of the impact of the growth will be borne by workers through a reduced real minimum wage. For example, let’s assume that the IPD-PC grows at an annual average rate of ten percent for the foreseeable future; under this scenario, 80 percent of the effects of inflation would be borne low-wage workers in the form of declining minimum wage purchasing power, while only 20 percent would be borne by employers.

Fifth, minimum wage growth can be suspended if the Commissioner of Labor and Industry determines that it would hurt the economy. Although there are requirements for hearings and public testimony, the Commissioner’s authority (and by proxy the Governor’s authority, since the Governor appoints the Commissioner) is virtually unchecked. Thus, an anti-labor administration could suspend minimum wage growth indefinitely. This is a cause of some concern to minimum wage advocates. On a more positive note, a subsequent administration could allow the minimum wage to increase so as to recapture some or all of minimum wage growth lost during the period that it was suspended.

While the minimum wage agreement announced yesterday did not accomplish 100 percent of what advocates hoped for, it nonetheless represents a major improvement over the status quo, which was a woefully inadequate minimum wage that continued to shrink each year in real terms because it failed to keep pace with growth in the cost of living. Even if minimum wage growth is suspended by an administration hostile to the needs of low-income workers, the lost growth can be recaptured in the future under progressive executive leadership.

Congratulations to progressive legislators in the Minnesota House and Senate, especially Rep. Ryan Winkler, who tirelessly and skillfully spearheaded the effort for serious minimum wage reform, which is now on the verge of fruition. Kudos also to the members of the Raise the Wage Coalition, who showed what can be accomplished when progressives at nonprofits, faith, and labor work toward a common goal. Raise the Wage overcame a host of bogus conservative attacks to achieve the first real minimum wage reform in over a decade; these reforms now have a real chance of becoming law within the next week.

The beneficiaries of the minimum wage compromise include low wage workers. No Minnesotan who works full-time should live in poverty and under the new agreement they won’t have to. Businesses will also benefit through predictable increases in the minimum wage over time that includes numerous safeguards to protect against excessive growth and a separate lower wage for small businesses and various categories of employees. The final beneficiary is the Minnesota economy, which will benefit from the increased stimulus provided by the purchasing power of low wage workers ($472 million annually according to a recent estimate) and the certainty and stability provided by fair growth in the minimum wage over time.

The Senate, House, and Governor should act quickly to make these major minimum wage reforms the law of the land.

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