The minimum wage should be a case study for the law of unintended consequences. Ever since its federal introduction in 1933 (only to be ruled unconstitutional by the Supreme Court in 1935, resurrected in 1938 as part of the Fair Labor Standards Act and upheld in 1941 by a Supreme Court with new members) it has been the government’s way to set a wage deemed “livable.”
Arizona ranks 30th in affordability indexes and 24th in the cost of living index, yet we have the fourth highest minimum wage in the country. The top three states with the highest minimum wage have higher costs of living than the national average, and yet Arizona’s is three percentage points lower than that same national average.
Take this example of how this translates across state lines. A locally owned company that offers generous benefits and pays above minimum wage as a standard, as well as offers an Employee Stock Ownership Plan, 100 percent tuition reimbursement and healthcare benefits remarked: “The minimum wage for our most significant competitor, which resides in the state of Florida, is only $8.46 per hour. Based on compensation alone, this has the effective impact of putting [us] at a 29.5 percent disadvantage when we quote against this specific competitor.”
So, in spite of having one the highest minimum wages, and our cost of living lower than the national average, we are still ranked only 30th in affordability of 50 states all the while losing competitive advantages of locally owned companies that significantly contribute to our local economy.
What are we trying to solve? Are we achieving the goal by raising the wage?
I absolutely agree that wages should be set at a “livable” standard or, using the language from the Women’s Foundation, paid at a “self-sufficiency standard” where wages, housing and child care are factored in and a family can make ends meet without public assistance. However, how we achieve that same goal is where the burden of unintended consequences comes into play. Let’s change the conversation from one that is based on setting a “minimum wage” to one where all benefits and consequences are taken into consideration.
When we reached out to our chamber membership to ask how the minimum wage increase impacted their business, the responses ranged from predictable to surprising. What I heard were variations of this: I have to increase my cost of goods, cut employee hours, increase overhead to preserve morale and/or reduce my current investment in employee wages, development and benefits. I expected to hear about absorption of costs and changes to labor; I did not expect to hear a dominance of remarks related to the negative impact on existing employees. That is counterintuitive to the goal in supporting employees.
Several responses on the survey mentioned the cost of compression and increasing all employee wages because they didn’t want to negatively impact employee morale for the lowest level wage earner because their rate, previously considered competitive, is now just a little above minimum wage. Several employers spoke of this issue and how the cost of compression compounds to equate to significant higher overhead costs. Higher payroll means higher payroll taxes, higher retirement contributions that are based on the percentage of wage and it’s about higher wages for the lowest level employees, and their manager, and that manager’s director and so forth.
One local company calculated an additional $250,000 increase in costs due to these changes. A locally owned and managed market that has 50 employees estimates a $40,000 increase in pay roll due to the new wage. To make this up, they will increase prices on their deli and groceries which customers will absorb with higher pricing. A restauranteur said that they will be absorbing higher vendor prices, as well as their own increased labor costs, and the menu price should be 15-20% to absorb the increase which is “impractical in the Tucson economy.” These examples simply show a shift. Employees will make more, but the cost of goods they purchase will also be more.
Did we really achieve the impact we wanted? Are employees now closer to self-sufficiency?
The responses that had the most impact on me were the less obvious ones. Business is not the only sector of our economy feeling the pinch. Pima County Superintendent of Public Instruction Dustin Williams recently pointed out the toll an increased minimum wage has on our public schools. Unlike business, schools can’t simply raise prices to cover the difference. The State’s education budget has been increased over the past few years but that has been primarily for increasing teacher salaries. To account for the minimum wage increase, school districts need to scramble to find money to cover those costs, which can come out of programs intended for students.
Another negative impact is on those employers that have committed to investing in their employees.
One wrote: “In IT, formal education is woefully inadequate. In response to this, we have built an apprenticeship culture that hires very junior people, that might not have a chance elsewhere, and we build them up. With the rise in minimum wage, this approach is less and less viable and puts us in a severe pinch where the educated students don’t have the attitude or necessary skills and the candidates that have the right attitude are too expensive for us to help develop the skills.”
And, from an employer that offers to pay tuition reimbursement for every single one of his 100 employees: “It’s my perception that this minimum wage increase has likewise adversely affected the desire of the average minimum wage employee to pursue college education that would otherwise lead to an increase in their value in the overall marketplace. As such, their thinking might go something like this: Why should I pursue a college certificate or degree when I now earn a wage that is fairly close to the amount that I would otherwise earn if I were to achieve the given certificate or degree, without having to suffer the time and expense of achieving such a certificate or degree?”
Ultimately, this issue once again reinforces why it is so important to advocate for skilling up our workforce as a region and society. Higher wages are a necessary step to achieve self-sufficiency and reduce dependence on government assistance programs. There are multiple ways to achieve this goal. First, skilling up talent and providing low barriers to entry to develop the skills that earn higher wages. Targeting funding, programs, apprenticeships, scholarships and rewarding employers investing in training and education for their employees all contribute to this goal. The other side of the coin is addressing the costs of housing and childcare. The cost of quality childcare for working families could be as high as 20 percent of a dual-income household. When every dollar counts and people are living paycheck to paycheck, this significant cost can be a deterrent to being employed or getting quality early childcare education programs significantly reduce the chances that same child becomes an adult either in prison or dependent on government subsidy programs. If the goal of regulating an increase in minimum wage is to create self-sufficiency, lowering barriers to receive quality early childcare is a two-generation change. Not only does it support those working to be self-sufficient by reducing their monthly expenses, it reduces the possibility that the child will rely on government assistance as an adult.
Along with the cost of childcare, housing costs for a family of three is slightly more expensive than childcare for that one child. Housing unit supply, construction costs and regulatory barriers all factor into housing costs. Creating diversity in housing types and being mindful of every cost driving expense should all be considerations when discussing housing affordability across all demographics.
Overall, the chamber will continue to promote and lead efforts that directly impact and/or support the ability to grow skills and gain an education. This targeted effort does not create any false realities and unintended consequences in legislating what a “minimum wage” should be. It creates an environment where individuals can better themselves, make an earned competitive wage and build the right skills to support our strong and growing industries.
Commerce that supports community comes from business success. Business success relies on having the right talent to fulfill all job duties. Talent ultimately drives all market decisions. To truly create a self-sufficient community, we must focus our attention and efforts on building skills and rewarding those investing in their employees. This is how to create a successful eco-system that not only supports business but builds communities.
Amber Smith is the Tucson Metro Chamber President and CEO.