Labor

Minimum wage and overtime changes come with unintended consequences

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On January 1, the state’s minimum wage and overtime exemption thresholds increased by more than nine percent. More specifically, the minimum wage was raised from $11 per hour to $12 per hour and the overtime exemption threshold grew from $33,000 to $36,000 annually.

This means employers are now required to pay employees at least $36,000 annually in order to be exempt from paying them overtime. While the intent of these policies is to provide a “living wage” to lower-income Mainers, they come with unintended consequences.

One of the unintended consequences of the minimum wage is the effect it has on individuals in the unskilled labor force. While workers realize an increase in wages, there is a population that experiences either a reduction in hours or loses their jobs altogether.

According to a working paper from the University of Washington, the average low-wage employee lost $125 per month after the minimum wage was increased to $13 per hour in Seattle in 2016. This occurred because employees lost more income through a reduction to their hours (9.4 percent) than they gained from the minimum wage increase (3.1 percent). Similarly, the Congressional Budget Office (CBO) estimates that increasing the federal minimum wage to $15 per hour would result in 1.3 million people, who would otherwise have jobs, becoming jobless.

Moreover, workers at Target stores have experienced the downfall of a minimum wage increase imposed by their employer. In 2017, Target increased their minimum wage to $11 per hour and committed to raising it to $15 per hour by the end of 2020. Last October, workers at several Target stores complained that their hours were reduced so drastically that they did not qualify for the company’s health insurance.

In other words, higher hourly wages did not compensate for the income lost from working fewer hours or benefits lost as a result thereof. While this policy was not mandated by the government, the reduction of workers’ hours at Target stores appears to be a microcosm of what occurs when wages are artificially increased above their true value in the market.

Further, as predicted, youth unemployment (16-24 years of age) in Maine has increased significantly since Maine’s minimum wage law passed at the ballot box in 2016. In 2016, approximately 7,000 people between the ages of 16 and 24, or 9 percent of this population, were unemployed.

After the minimum wage increased from $7.50 to $10 per hour, there were approximately 10,000 people between the ages of 16 and 24, or 11.4 percent of this population, who were unemployed. As a result of Maine’s minimum wage law, employers are looking for workers who are worth the artificially high minimum wage, and younger Mainers who require more time and resources to train are struggling to find work.

In addition, the minimum wage artificially increases the prices of goods and services, directly affecting consumers. According to a University of Leicester working paper, a 10 percent increase in the minimum wage increases food prices by up to four percent and overall prices by up to 0.4 percent. Price increases are typically determined by employers’ profit margins and how much of the loss they can pass onto to consumers.

One major claim by proponents of the minimum wage is that its increases have been the primary driver of declines in Maine’s child poverty rates. However, there is little evidence to explain their rationale except for a correlation between a decrease in child poverty between 2016 and 2017 (from 17 to 13 percent) and the increase to the minimum wage that first occurred in 2017. Of course, anyone who took a research methods class could explain that correlation does not equal causation (if you’re looking for a good laugh, check out Spurious Correlations).

Also, the minimum wage increased from $9 per hour in 2017 to $10 per hour in 2018. If increases to the minimum wage were causing declines in child poverty, one would assume that trend would continue to occur every time the minimum wage increased. However, child poverty actually increased by one percentage point (from 13 to 14 percent) after the minimum wage was raised in 2018. This may be a preliminary indicator that increases to the minimum wage are not directly related to child poverty rates.

The minimum wage isn’t the only policy that is changing in 2020. According to Title 26, Section 663, employees who earn more than 3,000 times the hourly minimum wage are exempt from being paid overtime. Thus, because of the recent minimum wage increase, employers are required to raise their employees’ pay to a minimum of $36,000 ($12 x 3,000)  in order to be exempted from paying overtime.

Regardless of state law, the overtime exemption threshold would have increased to $35,568 via federal guidelines that were changed in September 2019. Despite the recent increase to the threshold, the legislature will undoubtedly attempt to take a larger bite of the apple. 

LD 402 — a bill that was carried over from the last legislative session — will be debated by lawmakers this coming session. That bill would strike the current formula to decide overtime exemptions and replace it with fixed increases until January 1, 2023 for administrative, professional and executive employees. At that time, the exemption would be adjusted annually based on the percentage annual increase as published by the United States Department of Labor Bureau of Labor Statistics.

This bill would increase labor costs for businesses across the state. If LD 402 passes, it would increase the exemption threshold by 53 percent from $36,000 to $55,224 by 2022. Here’s a breakdown of overtime exemption increases since 2016 and what LD 402 proposes for future incremental increases:

For employers who compensate their employees at levels near the threshold and require them to work more than 40 hours — let’s say $38,000 annually at 48 hours per week — they would be required to increase their employees’ salaries significantly, pay them overtime or reduce their hours. Regardless of what occurs, the employer would lose money or productivity from this change.

Here’s the math behind either increasing employees’ salaries to avoid paying overtime or continuing to pay the same salary but providing overtime pay. 

Increasing Salaries: 

If the employer chooses to increase their employees’ salaries to avoid paying overtime and continues to require the employee to work 48 hours per week, they would lose $19,224 per employee annually by 2022. This is the simplest and most costly solution to comply with LD 402 under the scenario above.

Paying Overtime: 

If the employer decides to keep their employees at $38,000 annually and continues to require them to work 48 hours per week, they still lose some profit. According to Title 26, Section 664, employers need to provide 1.5 times the regular hourly rate for all hours worked in excess of 40 hours if they are not exempt from overtime. For $38,000, the hourly rate works out to be approximately $18.27 per hour. Under this scenario, an employer would be required to pay their employees who work 48 hours per week an additional $11,400 annually for a total annual salary of $49,400. 

While these are hypothetical examples, they make clear that employers would incur large costs if LD 402 became law. The other solution is to reduce employees’ hours, which would reduce productivity — a losing proposition for employers already struggling to find anyone who can work to keep their operations afloat.

In summation, the $12 minimum wage and potential overtime exemption increases outlined in LD 402 would harm low and unskilled workers and impose new costs on employers. For some businesses, the new mandates could cost more than they collect in profit, causing them to close their doors.

Put simply, these policies will make it more difficult to open or operate a business in Maine. Meanwhile, New Hampshire’s minimum wage is $7.25 per hour, making the state a more inviting environment for employers to start a business. While increasing the minimum wage and overtime exemption threshold sound like they will lift low-wage workers out of poverty, the reality is more complicated and produces the unintended consequences outlined above.

About Adam Crepeau

Adam Crepeau is a former policy analyst at Maine Policy Institute.

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