Dealing with low wages in Maine

November 24, 2014 Posted by Patrick Marvin - No Comments

There is no denying that the low wages earned by Maine people are a major concern for state policy makers.

Maine workers earn an average of just $26,464 per year, and over 35% of our population is classified as “low income.” Maine is even ranked a dismal 32nd in the country for median household income, highlighting the issue of poverty, and indicating to all of us that increasing wealth and opportunity broadly across the state is a major issue of need.

But the solution to this problem is much less certain.

When asked at the first gubernatorial debate in October whether or not raising the minimum wage was an appropriate response to Maine’s stagnant wages, both Mike Michaud and Eliot Cutler agreed that it should be raised.  Governor LePage did not, and instead suggested that wage growth should be accomplished with economic prosperity.

Said LePage:

“How about optimum wage? How about living wages? How about $25 dollars an hour jobs, $40 dollars an hour jobs, $50 dollars an hour jobs? That’s the jobs I’m going after. Minimum wage, I’ll leave that up to my opponents.”

The election may have concluded, but the policy fights over this issue have not.  Last week, the Maine People’s Alliance decided to take up the issue of the minimum wage, advocating that it be raised significantly.

In announcing their support for a hike, the MPA parroted a study by the Alliance for a Just Society (AJS), and echoed its conclusion that the minimum wage should be raised, to more closely approach a so-called “living wage.”

The “living wage” that the study identifies (what AJS arbitrarily calculates to be the salary needed to survive without any government assistance) was determined to be at least $32,905 per year in Maine, or $15.82 per hour.  Given that Maine’s current minimum wage is $7.50 per hour, adopting anything approaching the AJS’s so-called livable wage would more than double the pay for Maine’s lowest paid employees.

While the exact figure recommended by the MPA remains unclear, spokesman Mike Tipping suggested that it should be at least $10 per hour.  Scott Thistle of the Lewiston Sun Journal noted, having spoken with Tipping:

He said that even if the minimum wage were not intended to be a livable wage, it hasn’t managed to keep pace with basic inflation. Adjusted for inflation, the minimum wage in Maine would be $10.50 an hour, Tipping said. If it were adjusted for worker productivity increases, it would be $22 an hour. He said that if the minimum wage were tied to the same percentage increase achieved by the wealthiest 1 percent of Americans, it would be over $30 an hour.

Furthermore, while the AJS study that is being cited by MPA does not recommend an exact amount for the minimum wage to be raised to, it seems to be pushing hard for a figure north of $15 per hour. From the recommendations section of the report:

Wages should provide enough for workers to make ends meet. Seattle has set the bar for a minimum wage at $15 per hour. In the 10 states we look at in our study, a $15 wage would only cover the cost of living for single individuals in Idaho and Montana, and falls well short when factoring in families with children and households with debt. Meanwhile, it has been five years since the federal wage floor was last increased. Women and people of color make up a disproportionate share of minimum wage workers, and continue to see the detrimental effects of a low minimum wage. Congress must keep pace with increasing wage demands.

The bar, according to AJS, has been set at $15 per hour. MPA seems to be interested in something north of $10. Ultimately, the exact number is less important than the aggressive push for a significantly higher minimum wage.

Broadly, the concept of a minimum wage increase polls well with voters, because on the surface it seems like a common sense quick fix for a real problem to most people.  Unfortunately, this type of a change would instead cause great harm and bring with it several negative consequences.

Raising the minimum wage, particularly to the more than $10 per hour level advocated for by MPA, begs two questions: where would small-businesses get the money to increase the pay for some of their employees, and what would be the consequences to workers of this drastic shift?

The answer to the first question is uncertain, but the impact is clear.  Consider this: last winter, when President Obama proposed raising the federal minimum wage by $2.85 the non-partisan Congressional Budget Office analyzed his plan and concluded that it could eliminate roughly 500,000 jobs across the United States, with the potential of going higher, to perhaps 1 million jobs.

It isn’t hard to see why.  Many small businesses wouldn’t be able to handle the extreme shock of a minimum wage increase, and would be forced to lay off workers and institute other cost-cutting measures such as slashing benefits, delaying new hires, and doing away with valuable training programs.

If businesses aren’t able or willing to eliminate jobs, they will have little choice but to greatly increase the costs for the goods and services they provide in order to keep themselves afloat.

This may not sound dramatic, but imagine the impact on your wallet after paying two or three times what you currently pay for goods at the convenience store, or for food at your favorite restaurant.  In 2007, the Federal Reserve Bank of Chicago published a study that found that following a minimum wage increase, restaurant prices went up.

In Maine, many small businesses are only barely staying afloat, and dramatically increasing the cost of labor while making their products more expensive, could very well be the final death blow to their existence.  With less money to invest in inventory, capital improvements, transportation, and utilities, it could become impossible to stay open.

At the same time, there is a great deal of evidence that a hike in the minimum wage would actually reduce employment opportunities for low-skilled workers.

Minimum wage jobs are often “foot in the door” opportunities for workers.  Doubling the price for a business who wants to hire a worker will mean that companies will be able to afford fewer employees.  As such, a number of people who would have had the opportunity to work will now be unemployed.

Worse still, the move would have almost no impact on poverty, which is the central policy goal of this proposed change.  A 2012 review of minimum wage laws by Mark Wilson of the CATO Institute found that since 1995, “eight studies have examined the income and poverty effects of minimum wage increases, and all but one have found that past minimum wage hikes had no effect on poverty.”

This is not the right direction for Maine.

What then, is the solution to Maine’s income problem? If many small-businesses would not be able to survive a minimum wage increase, what could Maine’s government do to ensure workers receive larger paychecks?

The only real solution is economic growth.

The state must pursue policies that will allow businesses to have more free capital to invest.  It must provide an environment that is attractive for businesses to be started in Maine, relocated to Maine, and grown larger in Maine.  It must welcome and nurture wealth.  It must work to diversify the economy, and provide opportunity for both workers and business owners to thrive here.

That means making our tax burden a great deal lighter.  It means removing counterproductive, onerous regulations.  It means lowering the cost of energy and providing more flexibility and choice to laborers.  It means incentivizing work, and helping people improve their circumstances by transitioning out of state assistance.  It means better matching the state’s educational infrastructure and the workforce it produces with economic needs in the state.

A minimum wage increase is one of the most classic examples of well-meaning policy that fails to solve a problem it purports to address, and in fact makes the problem worse.  It is a Band-Aid solution that doesn’t even cover the wound.

Maine people are struggling with low wages for a litany of reasons, none of which is stingy employers who do not want to pay their workers more.  Rather, businesses simply do not have the means or the ability to pay their workers higher wages.

Only prioritizing economic growth will solve this problem, and it is long past time we come to grips with that fact, and work on transformative reforms that will truly accomplish our shared goal of creating a more prosperous Maine.