January 2019 Magazine

The False Promise of Minimum Wage

promise

RANDY ZOOK, PRESIDENT & CEO OF THE ARKANSAS STATE CHAMBER OF COMMERCE

Arkansas has committed itself to adopt a minimum wage that will substantially exceed the federal minimum wage. By January 1, 2021, Arkansas’ rate will be $11.00 per hour while the federal minimum will be $7.45, the rate in force in most states including all those that border us, except for Missouri. We will become a high-cost island when it comes to starting wages for many businesses.

What are the implications and likely results of this unprecedented and dramatic policy shift? Who will be affected and how? Let’s first consider the impact on employers, the people who will be required to pay this new added cost. The difference between today’s Arkansas minimum wage of $8.50/hour and the soon to be required $11.00/hour rate amounts to slightly more than $5,000/year per employee. That’s $2.50/hour times 2,080 hrs./year – the total work hours in a year for a full-time employee. Of course, any overtime hours will cost the employer even more: $16.50/hour.

So, with those basic facts, we can draw a couple of conclusions. One, the increased cost to employ low skill, low experience people will increase dramatically, over 29 percent, and in a short period. Business owners and managers will be forced to adjust to the new level, and their options are limited. They can reduce the number of employees, putting some workers on the street looking for a job. They can minimize employee’s work hours, forcing a reduction in their income. They can raise the prices they charge customers, perhaps losing some of their hard-earned business and damaging their financial prospects. Or they can invest in labor-saving technologies that eliminate the higher cost labor. Some of them will be forced to move to nearby, lower-cost states to operate. None of these are desirable outcomes, but businesses must adjust to changing rules despite the impact on valued employees and customers.

Now let’s consider this misguided policy from the employees’ viewpoint. Sounds terrific – a 29 percent raise for just doing what I’ve always done. What’s not to like in that deal? Plenty, if you play out some of the effects described above. The fact is minimum wage has never been intended to be a career, family supporting wage. It’s “the first job wage,” to gain some experience and learn how to work. It’s the “show us you are worth more” wage. Once those basic skills and experience are acquired, an employee can expect to earn increases to reflect his or her ability to contribute and create value for customers. If those raises, in reasonable amounts and over reasonable periods, are not forthcoming, an employee may need to move on to a better-paying opportunity or gain some further education and training to become more employable and more valuable.

The fact is, the minimum wage today only applies to a small percentage of employment relationships, less than ten percent. What’s been missing in the discussions is the reality of who will be impacted – young people just starting their working careers, low-skill employees who have not yet acquired the skills and experience to command higher wages or perhaps people employed by charitable organizations, small businesses with razor-thin profit margins employing only a few people or city/county government services as examples.

We are hearing from businesses across the state that all the above options are being considered and planned. Daycare operators, restaurant operators, city/county governments, schools and many just-starting businesses see this increase in their costs as a budget-busting existential threat that will harm their businesses and in turn our state’s growing economy. Arkansas has thousands of jobs available, most of which pay well above minimum wage even at the start of employment. These higher-paying jobs, many of which offer true career opportunities, require some training or expertise, but we don’t have enough people prepared to fill them.

Our real opportunity for economic growth lies in showing more people the way to these better jobs through career training programs, apprenticeships and work flexibility habits that can turn into value-adding, rewarding work experiences. The minimum wage false promise will do little if anything to advance those opportunities.

READ MORE: Mission Critical: Randy Zook

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Randy Zook is the president and CEO of the Arkansas State Chamber of Commerce and the Associated Industries of Arkansas. Prior to taking the helm of the State Chamber/AIA, Randy was the Deputy Director of Administration and Finance for the Arkansas Economic Development Commission.

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