Minimum wage hike: Hidden costs of compensation

by Sen. Doug Whitsett

Oregon currently has the second-highest minimum wage in the nation, behind only Washington State. That is due largely to the 2002 passage of Measure 25, a Constitutional amendment that raised the wage and requires it to be increased annually to adjust for inflation as it is measured by the Consumer Price Index (CPI).

Since then, Oregon’s minimum wage has increased, from the $6.90 per hour level set in 2002, to the current $9.25 per hour required by the CPI adjustments. Oregon’s present minimum wage is approximately 22 cents lower than Washington’s.

Multiple efforts are now underway to try and further boost the minimum wage in Oregon. Some legislators have discussed the possibility of introducing bills during the upcoming February 2016 session to achieve that aim. Many similar proposals were introduced during the 2015 regular session, but failed to pass before the Legislative Assembly adjourned last July.

At least four bills sought to repeal the state preemption of local governments’ charter and statutory authority to set minimum wage requirements. Around half a dozen other bills would have raised the wage in graduated steps over time. Still another bill was aimed at raising the minimum wage to $10.75 per hour by January 1, 2016.

Since the end of the 2015 session, a pair of ballot measures has been filed to raise the minimum wage to $13.50 per hour and $15 per hour. Regardless of whether the Legislature enacts a minimum wage increase during the February session, these ballot measures will be decided by voters in the November 2016 general election.

The minimum wage question and the ballot measures are already being debated in public forums. All indications are that the issue is being framed as workers versus business.

This perception is fueled by the use of the same sound-bites employed for years by liberal activists and interest groups that demonize job creators. With a complicit media, they have managed to turn “free-market capitalism,” “corporation” and “profits” into dirty words. They attempt to portray every business owner as being too “greedy” to pay employees a fair wage commensurate with the value of their labor.

Such an approach, while arguably politically effective, fails to accurately take into account the struggles and sacrifices made by Oregon small business owners.

I worked for many years as a small business owner in Klamath Falls prior to my career in the Legislature. That experience provided me with a very valuable perspective on the affects that public policies can have on businesses’ bottom lines.

Companies of any size cannot absorb sustained losses and hope to remain in business. When faced with increased costs, their four options are to increase the prices of their goods or services to their customers, reduce their costs, limit their profits or shutter their doors.

Any increases in costs caused by public policies are particularly problematic because they are not under the control of business management. Many industries are limited in the prices they can charge, due to competition from larger businesses, international competition and the willingness and ability of consumers to pay additional money for goods and services.

Entire sectors of our economy, including agriculture and forestry, are subject to prices set through international and global markets. Such businesses often operate on razor-thin margins, leaving entrepreneurs with few options with which to address cost increases. Public policies that artificially increase production costs make their goods and services uncompetitive and more difficult to sell.

What many people fail to understand is that direct compensation to workers is only a fraction of what businesses must pay in total employment costs.

My office received an e-mail from a small business in Grants Pass in mid-September expressing concerns regarding other payroll expenses. This business employs about 30 people and has received multiple awards for excellent service.

This business owner’s biggest problem is his company’s workers compensation insurance rates are directly tied to wages. They are also tied to any bonuses, commissions and gifts awarded to employees for good work. Put quite simply, an increase in any form of employee pay automatically results in a significant increase in the workers compensation insurance rates.

These are not the only costs affected by a boost in wages. The contribution rates that employers must pay towards Social Security and Medicare and unemployment insurance are also computed as a percentage of employee compensation.

Moreover, most successful employers pay their employees based on their ability, productivity, education and seniority. Any sudden sharp increase in entry level minimum wage results in a commensurate percentage increase for other employees. A 40 percent increase in entry level wages will result in a 40 percent increase in all employees’ compensation.

All of those aggregated costs for a company with 30 employees adds up quickly and must somehow be mitigated by the business, either by increasing prices for goods and services, or by employing fewer people. If those increased costs cannot be mitigated, business owners are left with scant options other than closing their doors, resulting in all their employees losing their jobs. Another certain result is less tax revenue with which to fund public services.

Politics is often the art of identifying with the underdog, and proponents of higher minimum wage get to claim that they’re “looking out for the little guy” and fighting against “corporate greed.” Political candidates have a higher chance of succeeding when they promise gifts to the public that must be paid for by other folks.

It’s much harder for job creators to raise objections to such suggestions without appearing to be “the bad guy.” Nobody campaigns on giving people less, and even fewer people are capable of winning an election based on such a premise. Given these dynamics, it’s much more politically expedient to argue for a higher minimum wage.

At the end of the day, it’s hard not to sympathize with anyone who works a full 40-hour week and struggles to survive as the costs of maintaining a household continue to soar. However, Oregon continues to be a national leader in poverty, hunger, homelessness, food stamps, Medicaid and the use of other welfare entitlements, despite having the second-highest minimum wage in the United States.

The abrupt raising of the minimum wage by as much as 50 percent will force many businesses to either raise their prices, reduce their workforce or close. It will not alleviate the crippling poverty that we see in this state. Any pay increases resulting from a higher wage will immediately be canceled out by the related higher costs for food, housing, energy and literally everything else.

Moreover, people who presently qualify for limited public assistance would lose their eligibility for many of those programs due to their higher earnings. These employees may be forced to choose between continuing to work and quitting their job in order to maintain eligibility for public assistance programs. They may very well end up worse off than they are today.

These are all important points to remember in the coming months as proponents for a higher minimum wage continue their push legislatively and at the ballot box. While the prospect of getting paid more for the same amount of work may seem initially appealing to many, the consequences of what it will mean for Oregon’s small businesses, and its people, cannot and should not be ignored.

Senator Doug Whitsett is the Republican state senator representing Senate District 28 – Klamath Falls