The Wages of Raising the Bare Minimum

The Wages of Raising the Bare Minimum
Randy Zook, president and CEO of the Arkansas State Chamber of Commerce and Associated Industries of Arkansas, argues that increasing the minimum wage too quickly will eventually take a toll of jobs and particularly hurt small businesses. (Kerry Prichard)

Randy Zook has a maxim on the topic of wages, straight from the Oracle’s mouth.

“Warren Buffett said that everybody is paid pretty close to what they’re worth,” recalled Zook, CEO of the Arkansas State Chamber of Commerce. That is, the free market sets the value of skills, ideas and sweat, and the market is the rational decider.

Zook’s philosophy faces a real test these days as new minimum wages push pay up in Arkansas and beyond. Workers in a score of states and the District of Columbia were scheduled for minimum-wage increases in 2019, and many cities and counties have joined the movement.

Arkansas voters embraced a November 2018 ballot issue that raised the state’s then-minimum of $8.50 an hour to $9.25 this year, $10 next year and $11 by 2021. Zook and others expect the increases to start to depress job creation, though wage activists point out that dire predictions haven’t yet come true.

“Yet” is the operative word, Zook said, foreseeing companies eventually eliminating open positions and stalling expansions. “People without skills will have fewer job opportunities.”

Meanwhile, the U.S. House passed legislation this month that Zook and allies like Montine McNulty of the Arkansas Hospitality Association see as an even greater threat: a doubled federal minimum wage of $15 an hour by 2025. Today’s $7.25 U.S. minimum hasn’t been raised since 2009.

While the Raise the Wage Act is unlikely to go through the Republican-controlled Senate unscathed, higher wages are now a rallying cry for an energized liberal wing of the Democratic Party, which also points to rising income inequality. In 2016, the top 1% of American earners reaped 20% of income, up from 12% in 1980. The bottom half of U.S. earners went from drawing 20% of total earnings in 1980 to just 13% in 2016.

Zook notes that the market is lifting wages, with “historically low unemployment of 3.5% and an economy that’s the best in the history of the world.

For skilled workers, “there’s never been a better time,” he said. “We just have to do a better job in training and letting students know what skills and jobs are out there. Good-paying jobs are everywhere, if you have what employers are looking for. The key is training, and technical skills. We all carry around more computing power in our pockets today than we had in the rockets that went to the moon 50 years ago.”

Technology raises another point for minimum-wage resisters: Zook and McNulty expect robots to start automating workers out of their jobs. “There are a lot of factors that people don’t consider,” McNulty said.

Zook sees the political appeal of saying workers deserve more bounty from a booming economy, but he and McNulty are leery of arbitrary wages and fear tinkering with a roaring economic engine.

“We want to keep the upturn rolling,” McNulty said. Raising mandatory pay too quickly will stifle job growth, she said, particularly for small businesses, including many of the 300 restaurants her association represents across the state. “Small places, mom-and-pop businesses, those will be the first to feel it,” she said.

Others say businesses resisting higher minimum wages protest too much. Little Rock lawyer David Couch, who led efforts to get minimum-wage increases on the Arkansas ballot in 2014 and 2018, noted that the Arkansas Chamber unsuccessfully sued to knock the wage measure off the ballot last year. After 68% of Arkansans voted for higher wages, Zook called Couch a thorn in his side, but one he’d never again underestimate.

Can 68% of Voters Be Wrong?

The Arkansas Hospitality Association also fought raising Arkansas’ bedrock wage, and the increases faced rollback attempts by Republican state Rep. Robin Lundstrum and state Sen. Bob Ballinger in this year’s legislative session. The state GOP and Gov. Asa Hutchinson stepped in to back the will of the voters, and efforts to exempt young workers and others from the raises collapsed.

Hutchinson told Arkansas Business he’d supported the 2014 initiative to raise a wage that hadn’t budged in a decade, but he opposed the 2018 measure as going too far, too fast. “Drastically raising the minimum wage in such a short time is counterproductive if employers are forced to cut back on employee hours or on their workforce as a whole,” the governor said in answer to questions relayed through spokesman J.R. Davis.

“The increase has impacted everything from school district budgets to assisted living facilities,” Hutchinson said, citing fears that higher mandatory pay could hurt youth employment by reducing entry-level openings. “Unemployment numbers do not always tell the entire story since young people may not enter the labor market and others may drop out because of a lack of job opportunities for their skill level.”

Still, the governor said he accepted the voters’ judgment, and concluded that employers are adjusting. “It’s still too early to know the full economic impact ... My administration will continue to monitor the impact, and I suspect we will have more clarity as employers make decisions in terms of automation and other cost-saving measures.”

Couch, who also wrote the state constitutional amendment that legalized medical cannabis in Arkansas, called predictions of major job losses from higher wage minimums “ridiculous.”

“In two sectors that cried wolf the most, hospitality and restaurants, employment was actually up. More jobs were created than lost,” he said.

Couch added that, unlike businesses and individuals benefiting most from 2017’s federal Tax Cuts & Jobs Act, who can bank their savings or buy back shares, low-wage earners are far more likely to spend extra earnings.

“These wages make the difference in putting a bowl of cereal on the breakfast table for your kids,” he said. “People making minimum wage spend their money. This money goes back into the economy to be spent at local businesses.”

The CBO Weighs In

The nonpartisan Congressional Budget Office found in a report this month that raising the federal minimum to $15 would increase the pay of 17 million workers and lift 1.3 million Americans out of poverty; it also offered a median estimate of 1.3 million workers losing their jobs, including hundreds of thousands in service industries.

A comprehensive study by University of Washington economists after Seattle became the first city to impose a $15-an-hour minimum wage in 2014 found that the increase “appeared to benefit low-wage workers as long as they already had a job when it took effect,” Benjamin Weissman wrote this year in Slate. Experienced workers got fewer hours, but earned about $19 more per week on average.

McNulty, however, said some hospitality association members will be unable to avoid cutting hours, or even jobs, if wages keep climbing. “This industry provides for many working mothers, young workers just starting out or people who really need a second chance. Many of these deserving people wouldn’t be considered at $15 an hour.”

McNulty also stressed that the House bill would end the “tip credit” that lets eateries pay less than minimum wage to workers who routinely receive tips. This traditionally means servers, bartenders, valets and hotel bellhops. Restaurants must pay these workers half of the minimum, and can count their tips toward the other half. Several jurisdictions that eliminated the credit have reversed that action because workers had less take-home pay, McNulty said.

“Restaurants have a narrow profit margin,” she said. When wages rise, they can reduce staffing, raise menu prices or “just suck it up, which may be impossible for a family diner in a small town.”

A $15 wage that sounds reasonable in New York or Seattle is a bigger ask in lower cost-of-living states like Arkansas, McNulty said, and higher minimums create friction up the pay scale. Experienced workers who came up under the old pay scale feel cheated if they don’t get commensurate raises, she said.

Perception vs. Reality

That sort of thinking frustrates Couch, who stresses humanity in the labor equation. “Minimum wages help hardworking people who really need it, and the reality is that every dollar turns over several times in the economy,” Couch said.

Zook replied that every business wants its workers to be more valuable; the challenge is finding a path that aids the bottom line for businesses and workers. “There is a perception that the rich get more than their fair share, but a lot more people are prospering in the U.S. these days, and more people are working their way out of poverty.”

Labor unions that once held great sway have been in decline. “They only have themselves to blame,” Zook said, citing years of corruption and abuse by union leadership.

The National Restaurant Association says labor costs are the industry’s No. 1 expense, and as the nation’s second-largest private-sector employer, it leads the charge against the $15 wage. But Zook and McNulty said many entry-level government employees and nonprofit workers earn wages similar to restaurant workers’, and a higher minimum would hit county, city and state agency budgets.

The National Retail Association also faulted the House plan, which President Donald Trump has threatened to veto.

But Couch, the lawyer behind the Arkansas wage vote, said businesses that predict ruin from an $11-an-hour minimum should look within. “I don’t mean to sound harsh, but if you’re in business and your margin is so thin you’ll be killed by paying an employee $30 more a week, then you need to end your business model.”