Our economy has changed, and pay has not recovered from the last recession. There are many reasons for this, but the reasons don’t matter to some leaders. They are tired of waiting and advocate legislating a minimum wage rate increase.
The last federal increase was implemented in 2009 to the current $7.25 level and it has remained unchanged since.
President Obama supports proposed legislation that would increase the federal rate to $12 by the year 2020. Amongst states, 17 have increased their own minimum wage rates in the last three years. Some cities have followed suit and implemented their own local wage rates.
In the Idaho legislature this month, advocates for the poor have proposed to raise the minimum wage to $8.25 in July 2016 and then to $9.25 in July 2017. However, Idaho legislators are moving forward with a measure that would ban local governments from increasing the minimum wage.
Oregon has been debating a rate increase for years, and labor interests are threatening a radical ballot measure, increasing the rate to $15. To avoid an electorate mandate, the governor and Legislature have put forth several proposals. One proposal that has passed the Oregon Senate would increase rates based on geographic categories (up to $14.75 in Portland, $13.50 in urban counties, and $12.50 in rural counties).
The underlying employment problem is a real and significant challenge. Urban areas have experienced a rapid cost-of-living increase. There’s a plentiful supply of entry-level employees, which keeps wage rates low. Laborers, including individuals who are supporting their families, have had to settle for lower-paying work.
Is increasing the minimum wage rate the right solution to the problem? To answer this question, most discussions center around whether or not a rate increase would result in additional jobs. Top economists are evenly divided on the answer, and analyses of labor statistics are not conclusive.
Economic theory has its limits. A review of the process will give a better perspective on the impact and limitations of a rate increase.
1) A business’ first reaction to a rate increase will be to stop and assess the impact of the change. The financial impact will vary greatly from business to business, but business operations that rely on a significant amount of entry-level labor will bear the greater financial impact from a rate increase.
Note that this “stop and assess” position does have an instant negative impact on the economy. I have an Oregon business client who has put capital expenditure plans and expansion discussions on hold until they know the results of the proposed legislation and what they need to do to survive.
2) Businesses will have to quickly change how they manage labor. They will not immediately cut jobs. Workers are still needed. But management will immediately be more careful with hires and will manage existing employees more closely. Hiring will be more selective, inefficient employers will be replaced more quickly, and stream-lining and innovation will be necessary.
3) Businesses experiencing wage rate increases will also have to raise product and service prices. There is no option. Increasing labor costs can only be offset with higher prices to customers. Price increases have a domino effect. Other businesses will pay more for materials, supplies and services, resulting in additional price hike. Consumers will bear the ultimate cost.
4) Short-term strategic investments will include capital expenditures in existing facilities towards labor-saving equipment and tools. Outsourcing alternatives will be appropriate for some businesses and will include looking to out-of-area providers.
5) Long-term strategic investment, especially for larger businesses with greater resources, will include expansion to other markets, sometimes international.
Well-managed businesses will survive a wage rate increase, but the benefits will provide little help to entry-level employees. The answer to the labor problem lies in increasing the value of the work force. Efforts should be directed toward education, practical experience (internships), training, social skills, specific skill sets and a traditional work ethic. These components will bring more value and better- paying opportunities to the worker.
Rick Howard, CMA, CPA owns Accounting NorthWest, PA. Rick graduated from the University of Idaho with a dual degree in accounting and economics.