Minimum Wage and the Consumer Price Index

A Bad Combination for Businesses and Local Economies

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. October 14, 2008

OCTOBER 3, 2006. Should the Minimum Wage in Montana, Arizona and Nevada Really Be Tied to the Cost of Condos and Cappuccinos in New York City, Los Angeles and Chicago?

This November, voters in six states including Arizona, Colorado, Missouri, Montana, Nevada and Ohio will decide whether or not to raise their respective minimum wage. Supporters that do not read the fine print on these ballots may be in for sticker shock when they learn that they are not just approving a one-time wage hike, but an annual increase based on the Consumer Price Index (CPI). Economists are estimating the CPI to be approximately 3 percent per year, but it has been as high as 14 percent. This is a particularly devastating proposition for rural states like Montana, where the annual CPI is calculated by taking price increases in the 87 largest cities in America-none of which are in Montana or three of its surrounding states.

"If approved, each of these states will set their minimum wage on autopilot for an annual increase whether the CPI is 3 percent or 13 percent," said National Restaurant Association Vice President for State Relations Tom Foulkes. "This will overwhelm states like Montana where the CPI will be based on the cost of condos and cappuccinos in New York City, Los Angeles and Chicago."

The CPI increase will further compound the increased labor costs to employers who pay minimum wage and employees in brackets directly above the minimum wage. Wage increases in the initiatives vary from $1.00 to $1.70. Taking the $1.70 figure, each minimum wage employee would receive a pay increase of $3,536.00 for 2007. Factor in wage compression of the gap between minimum wage employees and those making directly above minimum wage, and the $1.70 increase could affect employees making up to $10.00 an hour. If a business has 30 employees making wages between the minimum wage and $10.00 an hour that comes out to a $106,080.00 increase in wages for 2007 alone. Now tie that increase to the CPI for 2008 and expect a wage increase of at least 3% for those same employees every year.

Many employers will respond to these dramatic increases in payroll costs by reducing jobs and employee hours, raising prices for consumers or moving out of the state altogether.

Nearly every state legislature that has considered a minimum wage increase has rejected the idea of tying it to the CPI. Only the state of Vermont has adopted such a harmful wage policy. Ballot proposals in Colorado, Nevada and Ohio would set the CPI adjustment policy in the state constitution-leaving legislators virtually powerless to make adjustments during bad economic times.

"Proponents have a bad track record passing CPI wage hikes legislatively, so they are now taking advantage of cluttered Election Day ballots and uninformed voters to pass this destructive policy," Foulkes said. "This will foster a very anti-business climate in each of these states, not just for those that pay minimum wage, but for all employers."

The National Restaurant Association, founded in 1919, is the leading business association for the restaurant industry, which is comprised of 925,000 restaurant and foodservice outlets and a work force of 12.5 million employees - making it the cornerstone of the economy, career opportunities and community involvement. Along with the National Restaurant Association Educational Foundation, the Association works to represent, educate and promote the rapidly growing industry. For more information, visit their Web site at www.restaurant.org.