Business & Economy

Economists debate impact of $15 hourly minimum wage

Economist Tom Kavet. Photo by Anne Galloway/VTDigger

Vermont’s current minimum wage is around $3 dollars an hour higher than the federal level but it’s still substantially lower — after adjusting for inflation — than its peak in the late 1960s, according to analysts.

Last week, state economists told lawmakers that raising the minimum wage to $15 an hour would have both positive and negative effects on the economy. Predicting the long-term effects, they said, is difficult because of the magnitude of the proposed increase.

Tom Kavet, the Legislature’s economist, said the higher minimum wage would give more than a third of Vermont’s workforce a raise in 2022 — but it might also cost 3,000 jobs by 2028, or about one percent of the total workforce at that time.

Reaching $15 an hour by 2022 would be a new record high ‘real’ minimum wage and would require an unprecedented pace of increase, Kavet said.

The current minimum wage in Vermont is $10 an hour and is scheduled to go up 50 cents in January. The federal minimum wage is $7.25 per hour, which hasn’t changed since 2009.

Tom Kavet’s analysis of “real” vs nominal minimum wage.

Joyce Manchester, a senior economist in the Legislature’s Joint Fiscal Office, said that the prediction of 3,000 lost jobs is based on “the conventional wisdom of the day” learned from much smaller previous increases.

“As we learn more about the response of employers and workers and so forth to higher and higher increases in the minimum wage,” she said, the model’s results “could very well change.”

Legislators from the House and the Senate discussed raising Vermont’s minimum wage earlier this year. A bill introduced in the House suggested reaching $15 an hour by 2022 after a series of annual incremental increases.

The Legislature created the Minimum Wage Study Committee, which first met last week, to learn about the effects of such an increase. The committee is also charged with exploring how to address an increase in wages leading to a disproportionate loss of state and federal support, a phenomenon called the “benefits cliff.” Experts told the committee that working parents are most vulnerable to the “benefits cliff.”

Reports Kavet and Manchester submitted to the committee show that, for the past several decades, real wage growth in Vermont has been slow — and occasionally negative.

Manchester told the committee that, using inflation-adjusted dollar figures, the highest Vermont’s minimum wage has been was in 1968.

Using the same inflation adjustment, the minimum wage has been approximately 14 percent lower over the last several years, Kavet said.

Analysis by economist Joyce Manchester on minimum wage.

Kavet told the committee that around 25 percent of Vermont’s workforce will be earning below $15 an hour in 2022 if no changes are made.

If the increase goes through, Kavet said about 10 percent of the workforce, in addition to those at the bottom, would also see their hourly wages increase as employers adjusted their incomes to stay ahead of those making minimum wage.

In his report, Kavet wrote that raising the minimum wage as proposed would increase the total income of affected Vermonters by more than $240 million by 2022. This would lead to “powerful, positive local economic effects,” higher tax revenues, and lower expenditures on state benefit and support programs.

But, Kavet also wrote, these positive effects would be “largely offset” by higher prices for some goods and services, higher federal income and payroll taxes, reductions in federal benefit and support payments, reductions in private employee benefits, and businesses cutting jobs and hours.

“It’s gonna increase prices,” Kavet told the committee. “In industries where they can pass along prices, they will.”

When companies can’t pass increased labor costs on to the consumer, “it has to come out of something else,” Kavet said.

Business owners, he said, will ask themselves “Can I get by without those workers? Can I put a machine in that does everything?”

Kavet said businesses with high labor costs and many low-wage employees, such as retail stores, hotels, motels and particularly restaurants, would be most affected.

Responding to a question from Rep. Brian Keefe, R-Manchester Center, about where lost jobs and work hours would be concentrated, Kavet said rural areas would probably be the hardest hit because the jump to $15 an hour would constitute a larger increase over their current lower wages.

Sen. Michael Sirotkin, D-Chittenden, said the target of $15 an hour “is not cast in stone.” He said he wants the committee to more generally consider how to close the gap between the wages many Vermonters earn and the cost of their basic needs.

Kavet said that Vermont is not alone in considering whether to substantially increase its minimum wage, but doing so is “a big experiment.” In 2017, 21 states and Washington, DC, increased their minimum wage. New York, California and Washington, DC are all moving toward a $15 hourly minimum wage.

Many states, Kavet said, are recognizing that “there’s this enormous inequality that exists, that people at the bottom are really struggling, and there’s a hopelessness associated with that.”

But, Kavet added, “nobody really knows at what level” raising the minimum wage would be “counterproductive.”

“This is sort of aspirational,” he said.

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  • Edward Letourneau

    I wish they would have a discussion about what the taxes and fees in this state do to people.

  • Christopher Daniels

    Should high school kids without expenses get $15 an hour for their first job? The $10 per hour seems quite reasonable and livable while they are still under Mom and Dad’s roof.

  • bob Zeliff

    I would like to understand how many, in the long term, increasing the minimum wage will reduce jobs.
    I can conceptually understand a transition period were employers chose to pass on costs to their customer so there will be transition instability. But at some point in time the capitalist system will adjust…Stability will return.
    The result will be having many more Vermonters making enough money to support them selves, masters of their own destiny, coming off Vermont paid assistance programs.

    Yes we all will have to pay a bit more for our Walmart goods, or McDonald burgers…but that seems worth it if more Vermonter become self-sufficient.

    • Lester French

      Consider the possibility that with an increase in the minimum wage the cost of services such as child care would increase, groceries, gas, etc might go up or staff cut back. People earning above the new minimum would see an effective decrease because of the increase in the cost of goods and services. Likely welfare payment would also go up to keep up with inflation and keep people on public assistance.

      • walter carpenter

        “Consider the possibility that with an increase in the minimum wage the cost of services such as child care would increase, groceries, gas, etc might go up or staff cut back.”

        Well, they are going up now, with or without the minimum wage increase. They will keep going up with or without the minimum wage increase. With the minimum wage increase, we might be able to at least keep up with the costs going up. If not, well, your public assistance rolls will only get larger and larger.

    • jan van eck

      Bob, your musings are likely accurate, in the longer run the higher min wage will stabilize. Yet because government’s, and thus society’s, institutional parameters are not refocused, the overall result will, sadly, not produce greater societal wealth. Without greater wealth, the likely result will be retail trades simply decreasing hours, so your grocery closes at 7:30 instead of 9:00. You will also get the larger stores refusing to hire anyone for more than a 20-hr work-week, to avoid paying benefits (and you already have that situation spreading). Underlying this is a society that is not generating wealth.

      To get out from underneath this death spiral, you need to introduce greater value-added in the economic chain. Example: look at Burlington. What made that go was the IBM chip plant – lots of value-added product, and the wages to go with it. Ironically, it also spawned the current generation of Chittenden politicians who cannot grsp this history and install policies that wreck the State. Amazing.

      • walter carpenter

        “To get out from underneath this death spiral, you need to introduce greater value-added in the economic chain.”

        And let’s not forget how many temp jobs IBM/Global uses now at little pay and fewer benefits. If we want to get out of the death spiral, we have to make treat our workers as “value-added,” rather than disposable resources to make profits off of like we do now and then get rid of them when they are used up. Until then, we are just going to go down and down…

  • Elizabeth Chang

    The real issue is government waste and over spending. Just raising fees and wages is not The answers. It’s a shame elected people don’t read these comments as they would hear what real people are saying and feeling.

  • Mary Daly

    it boggles my mind to think that the government of the people and by the people will take this stand. Most employers do the best they can for their employees. Those that don’t probably don’t do as well with their business. Employees who work hard will undoubtedly get raises and increased benefits. Those who don’t will get a pink slip. What is wrong with letting the businesses decide what they can afford to pay and what they can’t? Where is the incentive to do a good or excellent job if there is no reward for doing so. Government should stay out of this!

  • Christopher Daniels

    I agree with you on this regarding adults, Walter.

  • Terry_Burdick

    ” If we really want to redistribute wealth, we can decrease the minimum wage by ten percent and require all higher tier wages to decrease ten percent too. ”

    But … but … but that would decrease the amount of tax collected by the government.

  • Edward Letourneau

    They pay higher rates, because they lack the deductions more affluent people can take. A good example is the education property tax. If you have no dependents, you pay more with the same income and home value as someone with 2 dependents. The problem isn’t the wage, its the tax system.

    • Matt Young

      Or better yet, folks who pay lots of property taxes AND tuition, they subsidize the failed public school factory.

  • David Dempsey

    Based on Mr. Kavets track record on overstating estimated income for the state year after year, I find it hard to have much faith in his predictions for this far more complex issue.

  • Matt Young

    So all employers are wealthy and can pay more? What if the increase in wage expense puts the employer out of business? Should we also have a maximum wage to safeguard the employer?

  • Matt Young

    Just talk with small business owners, leave your desk and go talk with them. High taxes, excessive regulation.

  • Matt Young

    Try to find a hard worker for $10 an hour, it would be very difficult. Add skills and the price goes up well beyond $15.

  • Edward Letourneau

    50% of rent goes to taxes and fees. You are calling for more taxes and fees, whether you know it or not.

  • Edgar Stout

    Hi Doug, stop by Lorenzini’s Automotive and have a conversation with Paul. I am not begging you, just making a suggestion.

  • Susanna Rodani

    This is the best assessment of the state of decline in Vermont I have read here on VTD. The natural beauty of VT has become literally unaffordable for the people who’s families go back generations and built VT because of sneaky political maneuvering and screwed up priorities. It seems all that is left is our memories.
    Thank you for your honest and straightforward assessment.

  • Matt Young

    Many of the same folks complaining about low wages are the same people who embrace Vermonts excessive regulations. Allow people to do business and wages will go up, that’s the solution. Redistribution schemes aren’t the answer.

    • Susanna Rodani

      You know that would all be great (again) if we could turn the clock back to the 50’s when a postcard was 2 cents and banks paid 5% on savings accounts, but it ain’t so. We live in a very different world now.

  • Steve Baker

    Yet towns make it so hard to build affordable housing and apartments.

  • Steve Baker

    Maybe start your own business and pay people what you feel is correct.