Minimum Wage

September 11, 2017 Juvy Dichoso

To Raise or Not to Raise 

While the debate rages on, economists have one simple answer: It depends.

 

The minimum wage debate has reignited on Guam. On February 13, 2017, Speaker BJ Cruz introduced bill 20-34, a proposal to raise the minimum wage from its current rate of $8.25 an hour to $9.20 effective October 1, 2017, and then to $10.10 on October 1, 2018.

 

The legislation has provoked strong reactions, and the debate over whether the minimum wage is a job-killer or a boon to struggling families has seemingly picked up where it left off in 2014, after the last increase proposal.        

 

Subsequent to raising Guam’s minimum wage by a dollar more than the national minimum of $7.25 an hour, the Legislature passed Public Law 32-229, which commissioned a third-party study by the Government of Guam to measure its impact.

 

So what were the results, and what are the implications for the new minimum wage increase proposed by Speaker Cruz? After analyzing a year’s worth of macroeconomic data and responses to surveys submitted to both local households and businesses, the study, which was conducted by local research firm Market Research and Development (MR&D), found the increase had no significant effects on the island’s economy.

           

So was this a victory for minimum wage proponents, or for its opponents? The answer is complicated and rife with caveats. Indeed, the economic meltdown often predicted by minimum wage opponents did not occur. Of the businesses surveyed, 11% laid off some of their minimum wage workers, and 20% reduced the number of hours worked. In spite of this, Guam’s gross domestic product (GDP), which is sometimes referred to as gross island product (GIP), increased by $100 million (from $5.6 billion to $5.7 billion), and Guam’s workforce increased by 2.2% overall and private sector employment by 2.6%.

           

These results would seem to be contradictory. How can Guam’s workforce and GDP show increases even while roughly one-third of businesses surveyed reported a reduction in employees and hours worked? There are two important factors.

 

First, the study surveyed businesses in industries for whom minimum wage workers are a significant part of their workforce, such as hospitality and retail. The study found that compared to the workforce as a whole, minimum wage employees account for less than one-tenth of the island’s total workforce, with an estimated 6,000 people total.

 

Second, during the time of the study, Guam’s economy was in an expansionary phase, meaning that businesses were more able to absorb the additional costs incurred by the minimum wage increase. In a recession, businesses and households might have behaved differently.

 

Additionally, the study did not indicate Guam’s economic expansion to either be caused or accelerated by the minimum wage increase. This brings us back to the original question: Is a further increase in the minimum wage good or bad? Would it even matter? As economists are notorious for saying, “It depends.”

           

Both sides of the minimum wage debate consistently reiterate certain arguments. Minimum wage opponents often say an increase will result in higher operating costs for businesses, who will then need to raise prices and/or lay off workers, all of which will neutralize any gains in income that might have been achieved through the minimum wage increase.

 

Minimum wage advocates counter by saying an increase is necessary because wages have not kept pace with the cost of living. A wage increase , as long as it is well-planned, will result in greater purchasing power that will exceed any increase in costs, the result being an increase in demand. This increase in demand will then spur economic expansion.

 

Although these talking points have been reliably lobbed back and forth by politicians, pundits, and interest groups for decades, research has shown that most of the time (with some notable exceptions) the effects of an increased minimum wage are minimal, even in the labor market.

 

Past minimum wage increases, however, have been small and incremental. Recently in the United States, various states and cities have been considering drastically higher minimum wages, with Seattle, Washington at the forefront. In January 2016, Seattle implemented a minimum wage of $13.00 an hour, with an ultimate goal of $15.00 over several years. As of July 2017, this is the highest minimum wage in the country.

 

Economists from the University of Washington analyzed data on Seattle’s minimum wage and published their findings in a June 2017 paper that found the effects to be mostly harmful. These findings caused the study to become a focal point in the national minimum wage debate.

 

The study has yet to be peer-reviewed, but has already raised a lot of questions. Minimum wage supporters and detractors have quarreled over it, while other economists wondered about its methodology. MIT economist David Autor, commenting on the study’s results for the website FiveThirtyEight, said, “Nobody in their right mind would say that raising the minimum wage to $25 an hour would have no effect on employment...the question is where is the point where it becomes relevant? And apparently in Seattle, it’s around $13.”

 

Closer to home, concerns about a higher minimum wage’s effect on the economy were voiced during public hearings held by Speaker Cruz on July 19, 2017. Among those who spoke were Mary Rhodes, president of the Guam Hotel and Restaurant Association, and Bobby Shringi, chairman of the Guam Chamber of Commerce, who testified to their respective organizations’ reservations about the bill.

As part of her testimony, Rhodes noted that the GHRA disagrees with the findings of the MR&D study due largely to its methodology. In response to a survey submitted by the GHRA to its member businesses, 94.4% said they were not interviewed by MR&D and 69.4% disagreed with the study’s findings that the most recent minimum wage increase had no effect on the economy.

 

The survey also showed that although GHRA members are split on whether or not to support a $9.20 increase, they uniformly oppose a $10.10 increase. Instead of raising the minimum wage, the GHRA suggests the Government of Guam focus on measures to develop the local workforce so that more people will be qualified for higher-paying jobs.

 

"The minimum wage, again, was meant to be an entry-level wage position that enables
workers the necessary skills to become contributing citizens,” Rhodes testified. “It is unrealistic to think that the standard of living can be improved by raising the minimum wage. With good performance and productivity, workers will have opportunities to command higher wages.”

 

Shringi, citing increased operational expenses, wage compression, and increased prices of goods as reasons for the Guam Chamber of Commerce’s opposition to Bill 20-34, agreed with the GHRA position that investing in workforce development would be a better means of raising the local standard of living. In spite of this opposition, the Chamber noted that, as Shringi put it, “the Legislature seems determined to move forward with an increase.”

 

Recognizing this, Shringi said the Chamber advocates a more modest minimum wage increase of $8.75 by January 2018 and $9.20 by January 2019. He pointed out that those increases are 6% and 5% respectively, which are higher than the 3% to 5% most private firms use as a basis for annual raises. Additionally, the Chamber suggests a tip credit wage of $7.25, much higher than the federal minimum of $2.13.

 

That the GHRA and Guam Chamber of Commerce oppose a minimum wage increase should come as no surprise, as this is the business community’s typical stance on the issue. There are exceptions, however. The Guam Women’s Chamber of Commerce, represented at the public hearing by board member and local attorney Vanessa Williams, supports Bill 20-34.

 

Williams said, “One of the missions of the Guam Women’s Chamber is to advocate for competitive wages and benefits for women. Women are disproportionately impacted by the minimum wage. Raising the minimum wage is one way to help close the wage gap.  A woman with two children working full-time at minimum wage lives near or below the poverty line.”

 

In response to the concerns cited by minimum wage opponents, Williams pointed to the effects of the last minimum wage increase. “We heard these same fears back in 2014 when the Guam Women’s Chamber of Commerce first supported raising the minimum wage...This argument speculates what might happen if the minimum wage increases, but we already know what in fact happened after the last minimum wage increase in 2015. In the year that followed in Guam, consumer prices fell, the unemployment rate dropped, there were more jobs, the weekly earnings of service industry workers increased, jobs and revenues in the hotel industry increased, all while welfare clients decreased. Meanwhile, GDP is up, and the forecast for Guam continues to remain optimistic,” Williams said.

 

She continued, “The idea that we can just pull ourselves up by the bootstraps is outdated. Maybe you used to be able to get an education, feed and house yourself, and work one job at 40 hours a week and still advance, but that just is not the reality anymore. Also, there is inherent dignity in all work, and the minimum wage should reflect that. Right now, it does not. The gap between consumer prices and the minimum wage is only growing.”

           

The Bill’s sponsor, Speaker Cruz, also weighed in during the public hearing. In response to the claim that the minimum wage was intended as an entry-level wage, Cruz quoted Franklin Delano Roosevelt, “No business, which depends for existence on paying less than the living wages to its workers, has any right to continue in this country. By living wages I mean more than the barest subsistence level, I mean wages of a decent living.”

 

On the argument that the answer to raising the standard of living is workforce development rather than a minimum wage increase, Cruz countered, “There are 34,000 people on Guam who have completed a bachelor’s degree, a graduate degree, or vocational training. Nearly half of Guam’s entire private sector workforce still makes less than $10.10 an hour. So it’s not an issue of education.”

           

Research suggests the lasting effects of a minimum wage hike depend on how high the increase is, how quickly it’s implemented, and how that relates to the local economy. Currently there are 29 states, along with the District of Columbia, that have minimum wages higher than the federal minimum, and the effects vary depending on the local economic circumstances of each area. When the minimum wage is out of step with the local economy, the effects can be disastrous, as was the case with American Samoa between 2007 and 2009, a favorite case history of the anti-minimum wage crowd.

 

Ultimately, it’s important to remember that it won’t be faceless numbers that are affected, but real people. Krisha, a food-service worker, is but one example. She lives in a household of five people including her son. Four of them—her parents, brother, and herself—work minimum wage jobs. “Altogether we’re able to make ends meet. We’re not struggling right now,” she said.

 

Krisha isn’t sure how an increase would play out, but believes it would definitely make her life easier. “I would spend the extra money on my son,” she said firmly. “I’m currently going to school to be a cosmetologist, but if the minimum wage was higher, I think I might consider staying in my current job.”

 

 

As to whether she thinks the minimum wage helps or hurts the families it’s meant to assist, Krisha said, “I think the minimum wage mainly helps families, but really it all depends.”

 

Spoken like a true economist.

 

PULL-QUOTE

If passed, only time will tell what the effects of a higher minimum wage will be. Research suggests those effects depend on how high the increase is, how quickly it’s implemented, and how that relates to the local economy.

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