April 11, 2005
ECONOMIC IMPACT OF RAISING THE STATE MINIMUM WAGE
By: John Moran, Associate Analyst
You asked how increasing the minimum wage would affect the state's economy. HB 6228, currently under consideration by the General Assembly, would increase the state's minimum hourly wage from $7.10 to $7.40 on January 1, 2006 and to $7.65 on January 1, 2007. This report examines the impact of the increase proposed under that bill's current language.
For Connecticut, which is a high-wage state, the minimum wage increase proposed in HB 6228 will not have a significant effect on employment and will provide a small increase in consumer spending. William Alpert, a UConn economist, said the proposed increases, which when combined are a 7.7% increase above today's $7.10 an hour rate, will have a minimal effect on employment rates. Economists at the Department of Labor's (DOL) Office of Research agree the effects on employment will be minimal, because so few people in Connecticut earn the minimum wage (about 2% of the state's workforce). They also noted the additional wages going to those individuals will be spent mostly on consumer items and other goods.
MINIMUM WAGE EARNERS IN CONNECTICUT
According to recent DOL figures, approximately 39,000 workers in the state earn at or near the minimum wage (see OLR Report 2005-R-0259). This is out of a total workforce of 1.79 million and an hourly wage workforce of 876,000.
INCREASE MINIMAL IMPACT ON JOBS
Both DOL's Office of Research and Professor Alpert indicate most analysts and economists do not believe an increase in the minimum wage has a negative affect on employment unless the increase is greater than 10%. The proposed Connecticut two-stage increase of 30 cents in 2006 and an additional 25 cents in 2007 result in a 7.7% increase over today's minimum wage.
“With an increase like this, there may be some disemployment effects but it will be minimal,” Alpert said. He uses the term “disemployment” because he said economists have not been able to show a correlation between increases in the minimum wage and higher unemployment. “Disemployment,” he said, reflects some job seekers simply giving up on looking for work and some jobs are not created due to the cost.
Connecticut's minimum wage increased from $6.90 to $7.10 on January 1, 2004 (after previously increasing 20 cents on January 1, 2003). The state's unemployment rate decreased from 5.2% to 4.5% (seasonally adjusted) between January and December 2004.
Alpert indicated increasing the minimum wage could have some disemployment effect on the relatively small number of workers, many of whom are teenagers, who work in minimum wage jobs. Alpert, who does not believe statutory increases in the minimum wage are an efficient way of providing low-wage earners with greater income, sees a range of possible minimal effects.
On one hand, Alpert notes a formula that economists use to measure disemployment holds that for every 1% that wages go up there is a 2/10th of 1% decrease in employment for sectors of the economy that have minimum wage jobs. The wage increase must be greater than the percentage rise in Consumer Price Index (CPI) or the CPI increase nullifies the minimum wage increase in terms of real costs. For Connecticut, a wage increase that is 1% above the CPI increase could, at its greatest impact, reduce employment by 2/10th of 1% of 39,000 minimum wage workers. That comes out to approximately 78 jobs.
Alpert noted the bill's increase is 30 cents in 2006 or about 4.2%. The 2005 increase in CPI, when the minimum wage will not increase, is likely to largely mitigate the minimum wage increase in real costs. For example the CPI increase from February 2004 to February 2005 was 3.0%. This is also true he noted for bill's 25-cent increase in 2007, which is about 3.5%.
On the other hand, there may be no decrease in the creation of these low-paying jobs (even if the wage increase is greater than the CPI increase) because employers find other ways to handles the costs, such as reducing fringe benefits, cutting other costs, or other means.
Economists agree that minimum wage earners typically spend nearly all of their wages, so any increase in their wages gets pumped back into the economy in consumer spending.
But since Connecticut does not have a large number of such earners, the impact is not large when compared to private sector employers paying approximately $66 billion a year in wages.
The minimum wage increase would add to the paychecks of the roughly 39,000 people working jobs at or near minimum wage. When both phases of the wage increase are in effect, the minimum wage earner working 40 hours a week will earn an additional $22 a week or $1,144 a year, before taxes. But some of the 39,000 working at or near minimum wage are waiters and waitresses, who can be paid less than minimum wage by their employers if their tips make up the difference.
This tip credit in Connecticut law allows an employer to pay a waiter or waitress 29.3% below the minimum wage as long as tips make up the difference. So for these employers the two-phase minimum wage increase would give wait staff a 40-cent hourly raise instead of 55 cents. For a 40-hour week this becomes $16 a week or $832 a year increase in pay, before taxes.