Expert reveals potential advantages, dangers of minimum wage increase

On May 24th, 2014 Governor Rick Snyder signed a bipartisan bill to increase the state minimum wage from $7.40 to $9.25 per hour. Michigan joins 8 other states and D.C. in increasing the minimum wage.

The increase will be staggered out in four increments according to the National Conference of State Legislators. The first increase is set for September 1, 2014, which will raise the minimum wage to $8.15 per hour. The minimum wage will then increase to $8.50 per hour on January 1st, 2015, and will continue to increase until January 1st, 2018. Interestingly, Michigan has tied the minimum wage to the Consumer Price Index or CPI.

According to the Bureau of Labor Statistics, CPI “produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.” This essentially ties the minimum wage to the current level of inflation, and is expected to take effect in January of 2019.

The process of updating minimum wage takes many months. There is still time before the first increase is scheduled to occur, and there are still concerns about how its implementation will affect local Michigan businesses.

Paul Sicilian, a labor economist who teaches at Grand Valley State University, gives valuable insight on deciphering the new law, and what it means for the local economy.

“The politics of it is high energy, but the economics of it are pretty small. There is even a mixed opinion amongst economists on how it will affect employment,” says Sicilian.

Sicilian does point out that some industries may be forced to become more efficient with their resources. This could serve as a catalyst for automization, and push for more integration of technology.

According to the United States Census, Grand Rapids has a median household income of $39,070. This is much higher than the annual income provided by minimum wage. Most people earn above the minimum wage, but there is concern over what will happen to the income of workers who make slightly over the minimum wage.

“If you’re earning above the minimum wage, employers want to keep you above the minimum wage… the percent of the population that earns the minimum wage is tiny, its less than 2% of the workforce. Employers will have to use their labor more efficiently,” says Sicilian.

There is a concern that by raising the minimum wage there will be inflation, but Sicilian counters by saying,

“By raising [minimum wage] by a little bit for a tiny part of the population isn’t going to have much an effect on inflation… if the employers can’t substitute away from labor or find more efficiencies that will eventually fall into prices,” says Sicilian.

However, he goes on to mention that since such a small amount of the labor force receives minimum wage that it should not bring dramatic price changes.

The minimum wage will start being adjusted to inflation, and Sicilian explains why that is important.

“You get this jerky wage for low income people, it is a big wage dump on employers all at once. Whereas, if it was just gradually rising its purchasing power stays fixed which is kind of the goal. It kind of saves this political fight to change it every few years,” he explains.

So, while the local impact might be hard to measure if not mostly diminutive, Michigan will be one of the growing number of states to open the national debate on how much the minimum wage should be increasing.