New Analysis: Maine’s Minimum Wage Misfire

Portland’s City Council recently voted to raise the city’s minimum wage to $10.10 an hour. Now, proponents at the Maine AFL-CIO have launched a referendum to raise the minimum wage statewide by 60 percent to $12 an hour.

In support of this effort, a liberal advocacy group called the Maine Small Business Coalition released a list of ideologically-aligned business owners who support the policy. (Subsequent reporting found that many of these business owners were self-employed; others were based in industries unaffected by a $12 minimum wage.) But empirical research suggests caution is needed before embracing a wage floor this high.

in a study last year, the nonpartisan Congressional Budget Office (CBO) estimated that a half-million jobs would be lost nationwide should a $10.10 minimum wage take effect. The CBO based its estimates on the results of dozens of peer-reviewed academic studies on the jobs impact of a higher minimum wage, include the latest and most up-to-date research.

In this analysis, Drs. David Macpherson of Trinity University and William Even of Miami University use Census Bureau data to replicate the CBO methodology to determine how many jobs would be lost should Maine embrace a 60 percent wage increase. They also examine the family composition and household income of affected employees, to determine if the wage increase would be well-targeted to families in poverty.

Impact on Employment

According to the Bureau of Labor Statistics, approximately 12,000 people in Maine currently earn at or below the federal minimum wage of $7.25–roughly three percent of the hourly workforce. Drs. Even and Macpherson estimate that approximately 115,000 employees in Maine would be impacted by the proposed minimum wage change to $12 an hour–roughly 20 percent of the workforce.

This broad expansion of the state’s minimum wage policy is reason for concern. As the New York Times reports, economists often look to the ratio of the minimum wage to the median wage as a metric for the policy’s appropriateness. One prominent left-of-center economist suggested that a ratio to best maximize the benefits and minimize the costs was one-half the full-time median hourly wage. In Maine, the median hourly wage is $16.29, which places the “appropriate” minimum wage at roughly $8.15.

Even this figure may be too high for some of the state’s small businesses. But it also shows how radical the $12 figure–nearly 75 percent of the current median hourly wage–would be for Maine.

When a business can’t offset these cost increases by raising prices, they instead have to find other means to reduce those costs–including a reduction in employment. Drs. Even and Macpherson followed the CBO methodology described above to estimate the job loss in Maine from a $12 minimum wage. They estimate that roughly 3,700 jobs would be lost in the state by the time the $12 wage floor is phased in in 2020. (Their full methodology is described below.)

Targeting to Families In Poverty

 A primary focus for proponents of raising the minimum wage is reducing hardship for families in poverty. However, a study of the 28 states that raised their minimum wages between 2003 and 2007 found little associated reduction in poverty. The authors suggested that the increases were not well-targeted to families in poverty.

In Maine, the data suggests that a similar problem exists. Just seven percent of the affected employee are single parents; in total, roughly 15 percent are single earners with families. By contrast, 55 percent either live with family, or are secondary earners where both spouses work. Because so many minimum wage earners live in households where they’re either a second- or third- earner, the average family income of a beneficiary in Maine is $54,313

A note on the methodology

This analysis relies on Census Bureau Current Population Survey data from January through December of 2014. It follows the methodology that the CBO detailed in an appendix to its 2014 report.

To project the distribution of wages in 2020 without passage of the new legislation, the economists assume that every potentially affected worker has wage growth of 2.9 percent annually until 2020 and that the labor force will grow by 0.86 percent annually.  These assumptions are based on the CBO’s own forecast of wage growth for low skill workers in their study of the employment effects of minimum wage hikes, and their projection of employment growth. For any worker who earned at or above the minimum in the year of the survey (2014) and whose predicted wage in 2020 was below the projected minimum in their state of residence, they increased their wage to the state’s minimum in 2020.   For workers who earned up to $.25 below the minimum in the year of the survey, they increased the wage by the amount that the state’s minimum wage would increase based on current law.

After generating the forecast of the 2020 distribution of wages reflecting wage growth and the effects of indexing on the minimum wage, they identified workers who would be affected by the new law mandating a $12.00 minimum as those with wages between the predicted state minimum wage legislated for 2020 and the proposed minimum ($12).  They also include those workers who were slightly below (up to $.25) the old and new minimum.