Minimum wage hike: Hidden costs of compensation

Sen Doug Whitsett

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

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  • Bob Clark

    Minimum wage is also a subverted way to gentrify. Those who can’t produce enough to make the labor price control amount, move elsewhere to look for work. Or, go to the shadows to work in the underground economy.

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  • DavidAppell

    Doug: If businesses don’t pay a livable wage, guess who makes up the difference?

    • MrBill

      Not everyone needs a livable wage.

      • DavidAppell

        But lots do. Do you like paying taxes for their housing supplements, food supplements, health care supplements?

        US businesses are very happy to let you and me pay for all that, so they can keep sending dividends to their shareholders.

        • MrBill

          Whether you pay for it through taxes or by paying more than you ought to for other stuff, you’re kind of doing the same thing. Either way you’re giving people stuff they haven’t earned. By keeping this up in perpetuity you’re just enabling them to stay where they are instead of working to get ahead. That’s kind of paternalistic.

          Good thing they have you to take care of them.

          • DavidAppell

            Who are you to judge what people have and haven’t earned??

            You seem fine with businessed leaving taxpayers to supplement their pay, so they can give more dividends to shareholders. Sucker.

          • MrBill

            Precisely. Neither you nor I nor the State are in any position to judge what anyone has or hasn’t earned. That’s a decision based on voluntary transactions between employee and employer in the marketplace.

            If you want businesses to be the ones to write the check, then fine. They just pass the added cost to us consumers so we pay either way.

            Why shouldn’t stockowners get dividends for taking a risk by investing in a company?

          • DavidAppell

            If a business’s business model depends on keeping its employees in poverty, it needs a new business model.

            And such a model should not be allowed. I’m not OK with paying part of a business’s cost of doing business. Why are you?

          • MrBill

            No one’s business model depends on keeping anyone in poverty. They need to pay competitive wages to get and keep the people they want.

            If you want to pay more for stuff, there’s nothing preventing you from doing that now. Buy from whoever you please, pay as much as you want, and pay your employees as much over the going rate as you please.

          • DavidAppell

            Wrong — many businesses say they can’t pay a livable wage.

            Why are you so happy to augment worker’s pay when businesses won’t?

          • DavidAppell

            “If you want businesses to be the ones to write the check, then fine. They just pass the added cost to us consumers so we pay either way.”

            What a stupid argument. Taken to its logical conclusion, it means businesses shouldn’t pay their employees a cent, leaving taxpayers to pay their entire cost of living.

            Investors would just love the dividends received — and undertaxed — in that model. You apparenly enjoy (rich) people walking over your face.

          • MrBill

            Businesses don’t get to pay whatever they want. Employees don’t get to be paid whatever they want. They meet somewhere in the middle. Both are subject to the laws of supply and demand.

            And so are stockholders.

          • DavidAppell

            If a business can’t pay a livable wage, they have no business being in business.

            You’re happy to get on your knees and pay for what businesses won’t pay for, while they channel money upwards to the owners.

            The owners are laughing at you for being such a sucker.

          • MrBill

            This goes back to my original comment. Not everyone needs a liveable wage. Not every job is even worth the liveable wage you are demanding.

          • DavidAppell

            Yes, everyone needs a livable wage. Just because they’re a teenager saving for college, or a car, or marriage or a house, doesn’t mean they don’t deserve the same wage as anyone else.

            Yes, every job is worth a livable wage. Because every job is done by a person who needs to live.

            I realize you’re all for businesses exploiting workers as much as possible in order to increase their profits. But I am, first of all, for people.

          • MrBill

            Adam Smith says otherwise.

          • DavidAppell

            Where did Smith say that?

          • DavidAppell

            “Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged.”

            — Adam Smith, Wealth of Nations, I .viii.36


          • MrBill

            “The price of labour, it must be observed, cannot be ascertained very accurately anywhere, different prices being often paid at the same place and for the same sort of labour, not only according to the different abilities of the workmen, but according to the easiness or hardness of the masters. Where wages are not regulated by law, all that we can pretend to determine is what are the most usual; and experience seems to show that law can never regulate them properly, though it has often pretended to do so.”

            -Adam Smith, The Wealth of Nations, Book 1, Chapter 8

          • DavidAppell

            This quote does not prove your point.

            Clearly Smith thought wages should be at a level as to keep workers out of poverty, as the quote I gave earlier shows.

            What surprises me is that a conservative is so willing to pay higher personal taxes just so businesses can pay higher dividends.

            That’s hardly what a “free market” is supposed to mean.

          • MrBill

            Smith was fine with high wages, but he saw economic growth in a free market as the driver behind those wages, not gov’t mandates which he saw as not helpful. This is what the quote I gave points to.

            On the other hand, your quote simply states that Smith wanted everyone to be flourishing and happy. Well everyone wants that. But he never says that’s a necessity, nor does he ever mandate hiking wages above what the price system operating in a free market would pay as a means of achieving that end.

            Businesses don’t have that much latitude in deciding whether to pay high wages or high dividends. They need to pay the wages the market demands. They need to pay other expenses as well. They can try to pay as little as possible, but they still have to function in the market and that means paying the prices the market demands. Whatever is left over after all expenses are paid is what can be paid out in dividends. And not only do they have to pay competitive wages, but they need to pay competitive dividends to their stockholders as well. Otherwise no one invests and they end up short of capital.

            Everything affects everything else. You can’t try to “fix” one outcome without creating problems elsewhere. Given that reality, I think free best markets are the best way to regulate all these competing interests. And I think Adam Smith would agree.

          • DavidAppell

            So you dismiss an Adam Smith quote you don’t like, in favor of one you do.

            I’m not surprised.

          • Robert


          • MrBill

            I’m fine with both quotes. I just didn’t think yours proved your point.

          • DavidAppell

            Clearly it does prove my point: even Adam Smith knew people had to be paid a livable wage.

          • DavidAppell

            “….they still have to function in the market and that means paying the prices the market demands.”

            And, clearly, you are happy to pay higher taxes so businesses can pay lower wages.

            I’m not.

            If a business model depends on keeping workers in poverty, it is not a viable business model.

            Because they should not depend on taxpayers making up the difference.

            Where does this end?

            Can a business pay the absolutely lowest wage possible, and pay the maximum dividends possible, and let taxpayers pay all the difference?

            Why are you such a chump, dropping to your knees for businesses?

          • DavidAppell

            “Everything affects everything else. You can’t try to “fix” one outcome without creating problems elsewhere.”

            Doesn’t explain why you’re so willing to fellate businesses and pay their expenses for them.

          • DavidAppell

            “….but he saw economic growth in a free market as the driver behind those wages….”

            What is “free” about a market when taxpayers must subsidize part of a business’s expenses?

          • DavidAppell

            “…not gov’t mandates which he saw as not helpful”

            Not helpful to whom?

          • MrBill

            Not helpful to David Appell.

          • DavidAppell

            Your reply makes no sense.

          • DavidAppell

            “If you want businesses to be the ones to write the check, then fine. They just pass the added cost to us consumers so we pay either way.”

            False. They would be businesses I simply would not do business with.

          • MrBill

            You’re free to do business with whoever you choose. N’uff said.

          • DavidAppell

            But we all pay higher taxes so businesses can pay below a livable wage and give their profits to the owners instead.

            And you’re OK with that kind of manipulation. Foolish.

  • fred291

    Your posts are always informative. This one and the following one are especially first rate. But you tend to paint OR a lot darker than it actually is. Our economy, for example, may not be performing ideally, but over thie last 15 years it has outperformed that of every other state in the US. As for being at the bottom of the league tables with respect to poverty and hunger, it’s just not true. Indeed, if one adjusts those measures for median incomes in each state, OR is a significant outlier on the good side. Our food stamp and medicare participation rates are higher than elsewhere (even when one adjusts for median incomes), but that is a direct result of state policies, which encourage participation. At the other extreme, OR has the lowest EITC participation rate in the US, whether measured by population share or eligibility. That’s one policy that can be be directly attributed to our higher minimum wage (altho alas the pecuniary gains accrue primarily to the IRS). It’s also possible that our long-standing lower labor force participation rate and, as you suggest, TANF rates are due to our higher minimum wage, maybe our relatively high homelessness rate as well.