26 Jan 2016

Minimum wage in New York State

Assistant director Namiko Mukumoto and senior researcher Seth Benjamin attended a breakfast forum at the Manhattan Institute to hear a spirited discussion of New York Governor Andrew Cuomo’s push in the New York State legislature for a $15 minimum wage. The former director of the Congressional Budget Office, Douglas Holtz-Eakin, the president of the Albany-based Empire Center for Public Policy, E. J. McMahon, and the chief executive officer of America Works, Lee Bowes, presented their views on the subject.

Starting off the conversation, E. J. McMahon explained that the federal minimum wage law set a floor on top of which the states could always create their own higher rate. He then gave a brief background of the value of the minimum wage from its inception in the 1930s under President Franklin D Roosevelt. Adjusting for 2016 dollars, the federal minimum wage was set originally at approximately $4.00. During the 1950s and 1960s it was increased by the federal government to reach its peak of $10.00 (in 2016 dollars). New York State’s minimum wage, as of the beginning of 2016, is at its highest level for some 37 years (again adjusting for current dollars).

What Governor Cuomo is proposing is a $15.00 minimum wage for “all jobs, all kinds, all people, throughout the state”; with a goal for reaching that figure in New York City by 2018 and the rest of the state by 2021. Moreover, the Governor is not talking compromise. The $15.00 figure is non-negotiable. What was not talked about by the supporters of the increase in the minimum wage, he said, and this was something he mentioned in his recent testimony before the New York State Senate Labor Committee, was the fact that there was a huge disparity in wages across the state. To put this into context, based on the data from the State’s Labor Department, he showed how the increase would have an effect on the median hourly wage in different parts of the State.

Using 2014 figures, the range for the median hourly wage (all hourly workers, whether full-time or part-time) was $21.73 in the New York City metro area to a low of $15.30 in Glens Falls (Warren County in the Adirondacks). Almost all upstate regions fall into the $15.49 to $15.91 range. What that means is the new minimum wage would be very close to what the current median wage is now and that will have a major impact on those parts of the State that are struggling now to create jobs. As Mr. McMahon explained, Binghamton, for example, was not suffering from low wages because the minimum wage was too low. Binghamton had low wages because of the lower cost of living.

The effect of the minimum wage increase can already be seen in the action taken by the State Wage Board that has administratively increased the minimum wage for employees of fast food restaurants franchised by the national chains (McDonald’s, for example). It is under a legal challenge but no injunction has been issued and so increase must be phased in. Also, State labor regulations have increased the ‘tip wage’ that restaurants must pay. Generally, tip wages are lower than the stated minimum wage. The big jump in tip wages has led some restaurants to do away with tipping and, instead, folding the increase in pricing on the menu into the employees’ wages.

Douglas Holtz-Eakin spoke as an economist about the national picture concerning the minimum wage topic. As president of the American Action Forum, a Washington DC think tank, he said this was a subject that the Forum has studied deeply, in particular with regard to the President’s call for raising the federal minimum wage to $10.10 per hour. The Congressional Budget Office has posited that such a move would reduce employment by about 500,000 jobs. Mr. Holtz-Eakin said that some basic facts should be made clear. The first was that if you raise the minimum wage you get slower job growth. The second point was that numbers belie the real problem with an increase in the minimum wage. With an American workforce of some 110 million, 500,000 jobs is not such a big deal. So minimum wage advocates can argue that one is not really ‘losing’ jobs, given the cost-benefit analysis. That, however, is not the way to look at it. Who are affected by the hike in the minimum wage? Generally, those affected are the low-income, low-skilled individuals who are in retail trade and restaurants. Remember, it is not the case that employers want to get rid of people just because of an increase in costs. In fact, the effect is seen in future employment trends. It is what he called employment dynamics, whereby there tends to be reduced hiring as a business reaction to the changing cost environment.

Of course, the good news is that those who get a job or keep a job get paid more. But, he said, think about it differently. What happens is that we have taken money from those who do not get a job or lose a job and given it to those get a job or keep a job. In effect, what one sees is redistribution. There is no new money; it is merely being shifted from one group to another. So, he maintained the increase in the minimum wage is a very bad way of targeting support for poor people. On the national scale, his research showed that only 7 per cent of the increase in wages went to people living in poverty. The final point he wanted to make was that in businesses that have ‘thin margins’ (revenue from sales is usually at something like one per cent over cost) there is always going to be pressure to increase prices. And, the clientele for these types of businesses tend to be poorer people. So, one ends up with a transfer of money from one group of poor people to another.

Finally, Lee Bowes, the chief executive officer of America Works, which is in the business of finding jobs for poor people, spoke about her experience with the raising of the minimum wage. She said that she has close to 5,000 employers that America Works uses to find jobs. She indicated that in New York City, the company is in all boroughs, except Staten Island. She surveyed the employers she works with. The top employers that America Works uses were sensitive to the issue, many being small- and medium-sized businesses, and about 75 per cent of them said that they would decrease the number of people hired hoping to get more productivity from the remaining employees. That would be the first impact of the raise in the minimum wage. Also, and more important in a way, they would no longer hire the types of people that typically America Works provides to them. Instead, they would look at people with at least an associate degree (that is, people with higher levels of learning) in order to get the higher levels of productivity. In addition to this, they would pass along the increased costs to their customers as best as they can. Interestingly, since many of the food businesses are part of national franchise chains, their costs and productivity are local and cannot be distributed to other franchisees. Some of her large employers said they would move to even greater automation. She gave examples in transportation, food services and movie chains. One of her large employers is a home health agency. These are regulated by state and federal law, including their budgets. Generally, this is because they are under contract with the states and the federal government.

Much was discussed about the Earned Income Tax Credit (EITC) as a better means of anti-poverty programmes. This is a federal benefit that the states can add to. The most important aspect of this programme is that it is built on the principle of working. In fact, E. J. McMahon explained that a single parent with two children who is working at $9.00 per hour (the current New York State minimum wage), together with other benefits, such as the formerly named Food Stamps, now has a yearly cash income of over $34,000. Douglas Hotlz-Eakin also mentioned that the EITC has been the most successful anti-poverty programme, because its core principle is the encouragement of working. As he put it, “the dividing line between being poor and not poor in America is work”.

All in all, a most stimulating panel discussion at the Manhattan Institute.