Hiking Maine’s Minimum Wage Would Further Erode Business Climate

Some bad policy ideas never die. In 2008 I wrote a study on LD 1697, “An Act to Ensure Fair Wages,” that would have increased Maine’s minimum wage by $1.00 and then indexed the minimum wage to inflation forever after.

Fast forward to today and we are confronted with LD 611, “An Act to Adjust Maine’s Minimum Wage Annually Based on Cost-of-Living Changes.” What would LD 611 do? It would increase Maine’s minimum wage by $1.00 and then index the minimum wage to inflation forever after. Where have I seen this before?

Proponents of the minimum wage increase like to stress how this money would go to low-income individuals who would spend this money and stimulate the economy.  Dr. Susan Feiner, Professor of Economics and Professor of Women and Gender Studies at the University of Southern Maine, recently testified in support of LD 611 stating that it would add “$166 million in new income and new spending per year.”

Of course, that is simply impossible. This new $166 million in income would not fall from the sky or grow on Maine’s pine trees, it would come from the businesses that employ these workers. As a consequence, these businesses now have less money to invest in new equipment or hire new workers. In other words, you can steal from Peter to pay Paul, but you won’t introduce any new income or new spending into the economic equation.

More troubling is that hiking Maine’s minimum wage, which is already higher than the federal minimum wage, would further erode Maine’s business climate relative to other states.

Simply comparing nominal minimum wage levels from one state to another is not useful since states vary in their economic condition. A more useful comparison is to create a ratio of the hourly minimum wage to hourly private sector wages and salaries. This ratio is an indication of how badly the minimum wage is distorting the job market within a state by artificially increasing employment costs. Thus, a high ratio is bad.

Chart Showing Ratio of Hourly Minimum Wage to Hourly Private Sector Wages and Salaries

The table above shows these ratios by state.  Maine’s ratio is calculated by dividing the current hourly minimum wage ($7.50) by the hourly private sector wage ($19.15) yielding a ratio of 39.2 percent–the 7th highest in the country and the second highest in New England. Maine’s stiffest and closest economic competitor, New Hampshire, comes in at 31 percent and only the 40th highest ratio in the country.

If Maine’s minimum wage is increased to $8.50 an hour, Maine’s ratio would jump to 44.4 percent and would be the 3rd highest in the country. Maine would also just miss dethroning Vermont as having the highest ratio in New England.

LD 611 would also bring another bad public policy idea to Maine–indexing the minimum wage to inflation, something only ten other states do at this time. Ironically, a higher minimum wage will be passed forward onto the consumer as higher prices. Higher prices means higher inflation which means a higher minimum wage which means . . . well, I think you get the point.

If the Legislature believes that Maine needs a higher minimum wage, this should be a transparent decision with a public hearing and a vote of the legislators. Laws with a long-lasting negative impact on Maine’s business climate must not be set on blind automatic pilot.