Home » City governments’ “voodoo economics”

City governments’ “voodoo economics”

By Ed Lane

According to a recent news report by MSNBC, Louisville became the first city in the South to boost its minimum wage from $7.25 to $9 per hour. Local legislation, passed by the Louisville Metro Council in December 2014, would increase the minimum wage over three years. The Kentucky Restaurant Association, Kentucky Retail Federation and Packaging Unlimited filed lawsuits that assert the Louisville Metro Council did not have the authority to set wage rates at the county level.

The Lexington Urban County Council has an ordinance in committee that would increase the minimum wage in Fayette County over three years to $10.10 per hour and include an annual cost-of-living increase. This proposed increase in Lexington’s minimum wage would be 39 percent.

There are a number of reasons mandated minimum wages for cities and counties are problematic.

In Kentucky, the April 2015 unemployment rate statewide was 5 percent; the rate was 4.5 percent in Louisville and 3.6 percent in Lexington. With such low unemployment rates (almost full employment), increasing the minimum wage could significantly increase inflationary pressure on the cost of products and services. Raising the minimum wage during a period of low unemployment could have unintended consequences for the state’s economy.

The University of Kentucky’s Kenneth R. Troske and Aaron Yelowitz conducted a study entitled “The Minimum Wage and Kentucky’s Working Poor” in 2007. Dr. Troske, the William B. Sturgill Professor of Economics at the Gatton College of Business and Economics, recently updated the 2007 report using current census data.

Here is a sampling of the conclusions from Troske’s updated report in regard to increasing the minimum wage in Lexington:

• There is overwhelming evidence that increasing the minimum wage will cause some people to lose their jobs.

• A 10 percent increase in minimum wage could lead to a decline in employment of between 0.75 percent and 3.0 percent in Lexington, based on job losses experienced in other U.S. cities.

• The total increase in wages for workers who keep their jobs is $117.5 million; the payroll decrease due to lost jobs is $25 million; the cost of goods and services provided by minimum wage workers in Fayette County will increase.

• A $10.10 per hour minimum wage in Lexington would cause 5.25 percent of low-wage workers to lose their jobs and have a minimal impact on poverty.

• Instead of raising the minimum wage, Lexington should either consider adopting an “earned income tax credit” (EITC) or waive a portion of the local occupational tax for low-wage workers.

• Kentuckians who are poor tend to have little education; raising the minimum wage does not address this fundamental issue.

An EITC is a refundable income tax credit for low- to moderate-income working individuals and couples, particularly those with children. The amount of the benefit depends on the recipient’s income and number of children.

Warren Buffett likes EITC – “The process is simple: You file a tax return, and the government sends you a check. In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.”

Proponents of the free-market system, including this writer, prefer for market demand to set the wage rates for employees. Recent announcements that Target, McDonald’s, Walmart, the University of Kentucky, the Lexington-Fayette Urban County Government, the Louisville Metro Government, and the Commonwealth of Kentucky all are raising their minimum wage levels will have a very positive impact on the wages paid in Kentucky.

For a local government entity to set the minimum wage for every business in its jurisdiction seems to be an overreach of its authority.

Very few city, county or merged governments have individuals serving as elected legislators who also have expertise on labor laws or the economic impact of minimum wage increases on the local economy. Raising minimum wages at the local level without careful analysis may create a new version of “voodoo economics” for the 21st century.  n

Add Comment

Click here to post a comment