Many myths exist about Minimum Wage

MINIMUM WAGE TESTIMONY: Misperceptions & Myths; EITC Recommended by the Center

March 30, 2017  FOR IMMEDIATE RELEASE

Providence, RI – The RI Center for Freedom & Prosperity published the full written testimony its CEO will submit to the House Committees on Finance and Labor, the latter of which will today hear multiple bills seeking to raise the state’s minimum wage rate.

“Every Rhode Islander who strives to work hard should be able to earn enough income to support themselves and their families,” writes Mike Stenhouse, who holds an Economics degree from Harvard University. “Yet lawmakers must act on the facts and not on the many myths that cloud this emotional topic.”

After pointing out many of the Ocean State’s poor business and family prosperity rankings, Stenhouse’s testimony cites research and raises concerns about a number of issues, including:

  • Job losses for many of the same people the legislation is intended to help
  • Myth about who is and who is not the typical minimum wage worker
  • Myth about a wage hike keeping our state competitive with our neighbors
  • Myths about increased minimum wages stimulating jobs and economic growth
  • The “wage-differential” factor that will harm employers who do not employ minimum wage workers

Union angle? The testimony also raises questions about a little-discussed issue … how special interest unions might benefit from a minimum wage hike.

Finally, the testimony makes a recommendation on behalf of the Center … that expanding the state’s EITC (Earned Income Tax Credit) is a superior alternative to hiking the minimum wage. “Directly assisting low-income families without risking job losses and without further burdening business owners is a much better path for our state,” concluded Stenhouse.

Governor’s Minimum Wage Policy Based on Untruths; Union Connection?

FOR IMMEDIATE RELEASE
March 9, 2015

Minimum Wage Hike Does Not Mostly Benefit Low Income Families 

Most RI minimum wage workers were white, middle-class. Only 14% were sole family income earners.

Providence, RI — Governor Gina Raimondo’s press conference today to promote a hike in the state’s minimum wage will create a negative drag on her own goal to increase jobs in Rhode Island. Further, most of the higher wages will likely go to white, middle-income workers, while potentially harming many of the very families the Governor’s plan seeks to assist.

This according to the nonpartisan RI Center for Freedom & Prosperity, which re-published findings from prior research reports.

The strong union support of the plan, with today’s press conference to be conducted at a union hall, raises significant additional questions. According to a 2013 Wall Street Journal article, it is common that many union contracts peg their base-line wages to the minimum wage.

“It is disappointing that one of the first major acts of our new Governor is to perpetuate policies that are harmful to our state’s job market and that bend to special interest demands,”said Mike Stenhouse, CEO for the Center. “The great irony here is that this policy will mostly benefit middle-class whites and union workers, as opposed to low-income minority families. The image put forth – that most minimum wage workers are minority family breadwinners – is simply not true.”
FAST FACTS. According to research by the Center, based on 2012 data, of minimum wage earners in Rhode Island:
  • Over 80% were white
  • $61,299 was the average family income
  • Over 71% were part-time workers less than 35 hrs/wk; 30% less than 20 hrs/wk
  • Only 6% were married, as sole earner
  • Only 8% were single parents
  • Almost 60% lived with their parents or some other primary breadwinner
  • About 60% were 25 years old or younger; over 40% 21 or younger
ADVERSE JOBS IMPACT. The Center’s 2013 report also found, that based on the minimum wage and jobs market at that time, a hike to the same $10.10 per hour level now being promoted by the Governor, would:
  • Destroy almost 3500 jobs, including breadwinners from low-income families
  • Be a continuing assault of the state’s economy
  • Be especially harmful to low-income workers who need upward mobility in a robust jobs market
Read the entire 2013 report here, Read other minimum wage studies by the Center.

 

Minimum Wage’s Cost in Jobs: 432 at $8.25 and 3,466 at $10.10

Profile of minimum wage worker is NOT of a low-income, family bread-winner.

Related Links: WJAR-10 TV Story; GoLocalProv Story; Pew Research Center: national data backs up our findings; CBO – nonpartisan federal agency echos job loss projections (2014)

2014 Wall Street Journal story confirms Center’s position

Video by FEE: The Truth about the minimum wage …

As an update to prior studies of the effect of increasing the minimum wage on Rhode Island’s employment situation, the RI Center for Freedom & Prosperity estimates that proposed increases could cost the state hundreds or even thousands of jobs.

Legislation passed the General Assembly in 2014 that will increase the minimum wage in 2015 to $9.00 per hour, from its current $8.00, which was itself a new increase from $7.40 2 years ago. When all is said and done, this jump from $7.40 to $9.00 will wind up costing the state hundreds or thousands of jobs, the lion’s share affecting teenagers.

Additionally, legislators in the U.S. Congress are advocating for an increase to $10.10 per hour or higher.  That change, we estimate, would destroy 3,466 Rhode Islanders’ jobs.

Minimum Wage Changes in Rhode Island

The very next session after the Rhode Island General Assembly voted to increase the minimum wage from $7.40 to $7.75, the legislature will consider bills moving it up again, to $8.25.  The elected officials who made H5079 and S0256 among the earliest legislation to hit the State House, this year, surely see the move as a campaign to help struggling families. But the RI Center for Freedom & Prosperity sees it as a continuing assault on the state’s economy and especially those most in need of upward mobility.

Last July, the Center found that Rhode Island’s move from $6.75 to $7.40, from 2005 to 2011, likely cost teenagers in the state 397 jobs.  The increase to $7.75 destroyed an estimated 200 more.

Based on the work of the economists who performed that study, David Macpherson (Trinity University) and William Even (Miami University), with a review of the Census Bureau’s Current Population Survey for 2011 and 2012, the Center estimates that, overall, the move from $7.40 to $8.25 will eliminate 432 jobs, 204 of them among teenagers.*

Who Is Affected?

According to the study, 24,846 Rhode Islanders currently have jobs that pay them at a rate of $8.25 per hour or less.  The “typical” profile — using the highest percentage by each demographic quality — is of a white non-Hispanic high-school graduate, 21-years-old or younger and with no college experience, who lives with his or her parents and works 20-34 hours per week. The following chart shows how dominant each of these qualities is in the under-$8.25 population.

Rhode Islanders Earning $8.25 or Less per Hour by Demographic Category

Simply put, the image of low-income families struggling along at minimum wage is mostly false. The average family income of Rhode Islanders who make $8.25 per hour or less is $61,299.  For these families, the minimum-wage job provides only supplemental income. As the following table shows, even two full-time minimum-wage incomes would barely amount to half of this average.

Annual Income Earned for Different Minimum Wages by Hours Worked per Week ($)

$7.40

$7.75

$8.25

20 hours

7,696

8,060

8,580

34 hours

13,083

13,702

14,586

40 hours

15,392

16,120

17,160

Notes: The percentages of minimum-wage-earning Rhode Islanders in each hours category is as follows:

  • Fewer than 20 hours: 30.2%
  • 20 to 34 hours: 41.6%
  • 35 or more hours: 28.2%

Results assume 52 weeks of work per year.

Source: U.S. Census, Current Population Survey, 2011 and 2012

The following chart illustrates that only a small minority of families rely entirely on a minimum wage income for support, even among households with some minimum-wage income.

Living Situations of Rhode Island Households with a Member Earning $8.25 or Less per Hour

What’s the Effect?

We estimate that the increase of the minimum wage from $7.40 to $8.25 per hour will result in a loss of 432 minimum wage jobs in Rhode Island. This total assumes a lower effect on better educated and older workers.  That’s a 1.74% reduction of employment available to people currently earning less than $8.25. Of those losing jobs, 204 will be teenagers.

The focus of advocates for higher minimum wages is very often on the plight of people striving to live on such low salaries, but most workers at that pay rate do not fit the profile.  Most of them are bringing in relatively small amounts of supplemental income — many as discretionary spending cash for teens and young adults who are still largely supported by their parents.

In the view of the RI Center for Freedom & Prosperity, the loss of employment opportunities for Rhode Islanders in this group outweighs the relatively small increases in take-home pay.  At young adults’ formative age, the connections, habits, and general experience that come from working at any pay scale are vastly more valuable than the small increases that legislators are able to mandate through minimum wage laws.

At the National Level, a Bigger Hammer

This morning, Rhode Island’s two representatives in the U.S. Congress, Jim Langevin (D) and David Cicilline (D), jointly announced their support for the “Fair Minimum Wage Act.” The act would increase the federal minimum wage — and, therefore, Rhode Island’s minimum wage — to $10.10 per hour.

The RI Center for Freedom & Prosperity estimates that this move would result in a loss of 3,466 jobs for Rhode Islanders, or 4.1% of the total number who currently work at or below that rate of pay.  Moreover, even with this broader net, the number of affected families that are subsisting on minimum wage income alone would still be just 17% of all households with at least one member earning that amount.

 

* Going back to the prior minimum wage rate of $7.40 was necessary because measuring the change from the current rate of $7.75 to $8.25 produced insufficient sample sizes.

Policy Reform: Reduce State Minimum Wage to Federal Level

Teen Employment and Weekly Hours worked are steadily dropping in RI

 

Minimum wage increases helping to sink teen employment in the Ocean State

As teens transition into adulthood and self-reliance, the likelihood of developing crucial career skills, of building their personal networks and résumés, and of earning valuable spending money is diminishing in Rhode Island. Moreover, a higher minimum wage is drag on jobs development for everyone looking for entry-level work.

See our “Teen Employment” policy brief here … 

 

 

ricfp-hoursper100teens-2002-2011

Teen Employment Sinking in the Ocean State

Quick links: to download the printable PDF of this study click here.  See Media Release at end.

Related stories: Research Director Justin Katz discusses the issue on the Dan Yorke Show.

Abstract

Gainful employment is disappearing from the experience of the American teenager (ages 16 to 19), and increasing minimum wages are part of the problem. In Rhode Island, teen unemployment was 28.3% in 2011, more than double its 2007 low of 12.9%, and hours worked per week had fallen from 10.0 to 6.1.

Rhode Island’s minimum wage climb from $6.75 in 2004 to $7.75 for 2013 will have cost 597 teenage jobs. As teenagers’ employment has fallen and their average hours worked per week have decreased, the weekly working hours per 100 teens in the population has dropped 62% — and 79% for those without high school diplomas. Because 70% of working teens are in the retail or leisure/hospitality industries, a bold policy change such as eliminating the state sales tax would be especially beneficial to them.

Getting Teenagers Accustomed to Working

Chores and a lemonade stand become a newspaper route and a summer job in retail, then a professional trade following high school graduation. If college is in the picture, retail transitions to on-campus service work followed by some sort of internship, which lands the young adult at the entrance of a career path, degree in hand. Such is the classic progression of young Americans’ easing into the workforce, with the adventurous and innovative breaking off to build their own companies or invent new industries.

The United States’ extended jobs recession appears to have accelerated a disruption of this pattern. The change has been acutely felt in states that have trailed the nation’s meager recovery, such as Rhode Island. From 2003 to 2011, teenagers’ share of employment in all Ocean State industries fell from 5.7% to 4.3%, despite the fact that their overall percentage of the population held steady.

In 2011, states with minimum wages that exceeded the federal rate tended to have higher unemployment. High minimum wages disproportionately harm teenagers’ employment prospects.  So, not only are young adults in such states operating in dampened economies, but the jobs that they would typically seek are even harder to come by.

Policy Recommendation

With Rhode Island in desperate need of an economic turnaround, and because dedicated and well-rounded young adults will be critical toward that end, the state must reverse the working plight of its teenagers. The RI Center for Freedom & Prosperity recommends that the General Assembly and Governor Chafee:

  1. Set Rhode Island’s minimum wage at the federal rate of $7.25.
  2. Consider a bold economic policy, such as eliminating the state sales tax, that would jolt the overall economy forward with especially beneficial effects for the teenage population.

Minimum Wage & Teen Employment

The effect of minimum wages on unemployment rates is a contentious issue among economists. Until the 1990s, they broadly understood increased minimum wages to harm employment. Since then, various studies have muddied the waters.

Given the myriad variables involved in a modern economy, small-scale policy changes can disappear in the data, and incremental minimum wage hikes may not register. Consensus is still strong, however, that low-skill, low-pay groups like teens are adversely affected by such increases.

Of the 24 states with unemployment over 8.0% for 2011, 11 had set their minimum wages above the federal $7.25 per hour. Of the 26 states with 8.0% unemployment or lower, only six had elevated minimums.  The average unemployment rate for former was 9.0%, compared with 7.7% for those in which the federal rate applied.

That gap doubles for teenagers (16-19 years old).  In states where the $7.25 minimum applied, teens’ unemployment rate was 21.7%. In the elevated-rate states, it was 24.3%. Chart 1 illustrates the point, narrowing the focus to the eight states with minimum wages over $8.00 per hour.

United States Unemployment and Teen Unemployment by State Minimum Wage, 2011

Rhode Island

In 2011, the Ocean State’s teen unemployment was 28.3%, the worst in New England, and more than double its 2007 low of 12.9%. Meanwhile, the weekly hours of the average employed RI teen dropped from 10.0 to 6.1.

Putting Rhode Island in context requires an acknowledgment that it simultaneously has the most-sickly economy in New England and the second lowest minimum wage, in 2011. The $7.40 per hour the state mandated for the lowest-paid employees within its borders was higher than only New Hampshire’s rate, regionally. Increasing the rate to $7.75 this past legislative session pushed the Ocean State past Maine, as well.

At first glance, these comparisons would seem to contradict the notion that high minimum wages are associated with higher unemployment. As suggested above, however, minimum wage is a secondary factor and is not sufficient to save a state economy that is already failing.

In an update for the RI Center for Freedom & Prosperity of their 2010 study, “The Teen Unemployment Crisis,” economists David Macpherson (Trinity University) and William Even (Miami University) found that Rhode Island’s increase from $6.75 in 2005 to $7.40 cost the state’s teens 397 jobs in 2011. Of that total, 306 were lost to those without high school diplomas. As the Center reported in June, Macpherson and Even estimate that the additional hike, to $7.75 per hour, will cost Rhode Island’s teenagers another 200 job opportunities.

In total, that $1 raise will have cost about 2.7% of employed teens valuable work experience, increasing to about a 7.1% loss among those without high school diplomas.

Table 1 shows the dramatic drop in teen employment from 2002 to 2011. For perspective, the 2010 Census found 66,423 Rhode Islanders 16-19 years old — about 32,663 without high school diplomas.

 

Table 1
RI Teen Employment Trends by Age and High School Diploma
16-19, no diploma 16-19 18-20, diploma
Employment
2002 (%) 38 49 64.3
2011 (%) 19 32.4 49.2
Change (%) -50 -33.9 -23.5
Ave. hours/week
2002 6.7 10.7 19.3
2011 2.8 6.1 13.1
Change (%) -57.6 -43.1 -32.3
Hours/100 teens
2002 254.4 522.2 1,240.20
2011 54 196.5 642.2
Change (%) -78.8 -62.4 -48.2
Note:“Change” percentages may differ due to rounding.Source: Census Bureau & Bureau of Labor Statistics, Current Population Surve

 

Not only are fewer teens working, but those who have jobs are spending less time on them. The weekly hours worked per 100 teens in the total population captures the combined effects of these trends. Employment is evaporating from teens’ experience in Rhode Island.

Massachusetts shows that a high minimum wage doesn’t always correspond with high teen unemployment (see Chart 2). But if Rhode Island insists on imposing a high rate, it must take even more dramatic steps to improve its economy to counter-balance the downward pressure on employment.

U.S., Rhode Island, and Massachusetts Teen Unemployment, with Minimum Wage Changes, 2002-2011

One Solution: Eliminate Sales Tax

In early June, the RI Center for Freedom & Prosperity proposed its Zero.Zero plan to eliminate the state sales tax in Rhode Island.  Such a policy would be especially beneficial for teens.

The Center found that immediate elimination of Rhode Island’s sales tax would create 23,873 jobs. The data did not differentiate between industries or the demographic qualities of the newly hired workers, but it would be reasonable to predict that teenagers and other low-wage workers would benefit disproportionately and more immediately.

By far, Rhode Island teenagers are more active in the very industries that most feel the effects of the sales tax: retail and leisure and hospitality. Of teens who were working in 2011, 23.5% were in the retail industry, where they accounted for 8.8% of the workforce. Another 46.4% worked in the leisure and hospitality industry, accounting for 17.8% of all employees.

Altogether, 69.9% of working teens were in these two industries. Clearly, the healthier retail and leisure market in a zero percent sales tax environment would benefit the lowest-paid workers first, including Rhode Island’s young adults.

Conclusion

As with all of the challenges that it faces, Rhode Island has a choice between paths: the one we’ve been following and one that shifts decision-making back toward individuals working together in a less-regulated private economy. The first shifts resources under the control of government planners, and the second would allow Rhode Islanders to keep their money and make decisions in accordance with their own interests.

For all of the emphasis that the state has been placing on developing a “knowledge economy,” it has paid precious little attention to the need to foster work ethic and experience in its youth. Meanwhile, lavish public-school funding and special deals toward government-approved economic development have been requiring increasingly high tax burdens — in the form of the incrementally broadening sales tax, of ballooning property taxes, and of expanding licensing requirements and fees.

Instead, Rhode Island’s emphasis should be on getting people, especially young people, back to work, regardless of their field or pay scale.

***

MEDIA RELEASE: July 24, 2012

A 28.3% teen unemployment rate is sinking career building opportunities for Ocean State youth according to a report released today by the Rhode Island Center for Freedom and Prosperity. This unemployment rate has more than doubled in recent years to become the worst in New England, and demonstrating even further weakness in the teen sector, the report also highlights that the number of hours worked has dropped by over 40%.

“If our state is to rebound in the long term, we need our working-age youth to learn to become productive. As part of their transition into a career that fosters self-reliance, teens are looking for valuable workplace experience and resume building, in addition to a little pocket change”, said Mike Stenhouse, CEO for the Center. “Unfortunately our overly burdensome regulatory and tax structure, along with statewide minimum wage increases, are resulting in fewer opportunities for everyone and disproportionately harm our teens. This category would grade-out at yet another F for our state,” continued Stenhouse, referring to the Competitiveness Report Card published earlier this year by the Center.

According to the report, high minimum wage states had a 24.3% teen unemployment rate, compared with 21.7% for states at the federally mandated rate. Further, Rhode Island’s recent minimum wage hikes will cost almost 600 area teenagers a chance at an entry level job. Even for those young adults who were fortunate enough to find work, the average hours worked plummeted to 6.1 per week from 10.7.

As about 70% of working teens are hired in the retail or leisure/hospitality industries, the Center recommends two policy changes: lowering the state minimum wage rate to federal levels; and a phase-out the the state sales tax, which would not only reinvigorate the state’s economy, but would be especially favorable for the retail industry, creating new job opportunities for younger Rhode Islanders.

Today, July 24, is the National Day of Action to Raise the Minimum Wage. “The RI Center for Freedom & Prosperity categorically rejects this ill-informed policy push. A minimum wage hike is yet another regulation that strangles businesses; our report provides clear evidence of the negative, unintended consequences that meddling in complex economic issues can often bring about,” concluded Stenhouse.

The complete teen unemployment report can be downloaded from the Center’s website at www.RIFreedom.org .

Earlier this year, the Center published a policy brief detailing the negative effects of the state’s occupational licensing policies on opportunities for low income and entry level workers. Another report – Zero.Zero – detailed the positive economic effects of eliminating the state sales tax.

The Rhode Island Center for Freedom and Prosperity, a non-partisan public policy think tank, is the state’s leading free-enterprise advocacy organization. With a credo that freedom is indispensable to citizens’ well-being and prosperity, the Center’s mission is to stimulate a rigorous exchange of ideas with the goal of restoring competitiveness to Rhode Island through the advancement of market-based reform solutions.

Minimum Wage Hike Will Cause Loss of 200 Teen Jobs in RI

Watch this video by LearnLiberty.org to see how increasing the minimum wage increases unemployment among low-skilled workers

On the heels of a national report that painted a bleak employment picture for teens, the Rhode Island Center for Freedom and Prosperity issued a policy note today that shows that the Rhode Island General Assembly has made the teen jobs situation even worse in the Ocean State when it raised the state minimum wage by 35 cents to $7.75.

 According to updated data made available to the Center from an earlier study(i) by nationally recognized economists, Rhode Island teens are projected to see 200 fewer jobs this year as a result of the minimum wage hike. This loss, 1% of teens employed in 2011, will hit especially hard on those who do not have high school degrees; this group is expected to suffer 75% of the anticipated loss.

Rhode Island’s teen unemployment rate in 2011 (28.3%) is already 3.4 percentage points higher than the national average of 24.9%. The minimum wage increase will make this discrepancy even worse.

The data, which will be part of a more comprehensive teen employment report the Center plans to release in July, is “yet another example of the death-by-a-thousand-cuts syndrome that is depressing our state’s growth,” said Mike Stenhouse, CEO for the Center. Continual small increases in taxes and regulations are often implemented for compassionate reasons, but it is the contention of the Center that the cumulative effect of these polices has been devastating for area businesses, for the state’s economy, and especially for those seeking work.

“Imagine that because of this minimum wage increase two hundred more Rhode Island teens are not going to have the chance to earn a paycheck, to learn important business skills, or to build their personal résumés,” concluded Stenhouse.

(i) “Update of Evan and Macpherson, 2010.” Economists David Macpherson (Trinity University) and William Even (Miami University) released a study in 2010 that examined the impact of the federal minimum wage increase between 2007 and 2009. 
 
Media Coverage:
6/19/2012: Prov. Business News, Minimum Wage Bump Will Cost 200 Jobs
6/19/2012: GoLocalProv, Minimum Wage Hike Will Cost 200 Teen Jobs, Group Says