Letter to Gov. Rendell on the Minimum Wage

January 23, 2006

Governor Edward G. Rendell
225 Main Capitol Building
Harrisburg, Pennsylvania 17120

Dear Governor Rendell,

I understand that politicians sometimes change their policy positions. And I probably don’t have to remind you of your position on the minimum wage in the 2002 gubernatorial campaign when you said:

“Right now Pennsylvania businesses carry a very high tax burden compared to states we compete with. We’re [a] very heavily taxed business state…. To raise the minimum wage in just Pennsylvania, particularly for small businesses, would add another premium for doing business in the state.”

But the economic reality in Pennsylvania, Governor Rendell, is that the “premium for doing business” in our Commonwealth has only increased—not decreased—under your tenure. Since you took office in 2003, the people of Pennsylvania have been burdened with higher taxes, greater debt, and unsustainable spending.

Now—taking a page out of the labor unions’ playbook—you would do further harm to Pennsylvania’s small business economy by hiking the minimum wage by nearly 40%. It won’t be the big corporations that will immediately feel the negative impact of your artificial increase in labor costs. It will be Pennsylvania’s small, “mom-and-pop” businesses that are harmed by your change in policy positions—the same job creators that felt the sting of your 10% increase in income taxes in 2004.

You are well aware that 97% of Pennsylvania firms are small businesses. And most of these companies could not easily pay for an artificial increase in labor costs. If they are unable to raise their prices or attract more customers, they will be forced to do more with less—and that will most likely translate into reduced or lost jobs and benefits.

I know, I know, you don’t believe the Commonwealth Foundation’s economic analysis conducted by Dr. Macpherson of Florida State University that projected an increase in the minimum wage from $5.15 to $7.15 per hour would cost more than 10,000 jobs to working Pennsylvanians and more than $262 million per year to job providers.

At your January 19th news conference with your labor union contributors, as well as in the letter you recently sent to members of the General Assembly, you argued that our analysis should be disregarded because Macpherson’s calculations have been wrong in the past. Nothing could be further from the truth. In fact, the only thing you accomplished in your attempted refutation of our analysis was to erect a straw man, put the Commonwealth Foundation name on him, and attempt to knock him down.

Dr. Macpherson did not, as you suggest, attempt to estimate the total number of jobs in future years (in Pennsylvania, or any other state he has studied). Rather, the economic modeling he used merely projects that more than 10,000 jobs would be lost due to an increase in the minimum wage, in and of itself. It is not a projection of total jobs created or lost in the overall economy. Therefore, you are accusing us of making job projections we did not make.

Allow me to explain it another way. When you hiked the Personal Income Tax by 10% from 2.8% to 3.07% in 2003, our economic modeling program predicted that more than 33,140 jobs would be lost in Pennsylvania in 2004. According to your reasoning, we were wrong because Pennsylvania actually created 70,500 jobs in 2004.

But do you really think it is a stretch to suggest that if you had not sucked an additional BILLION dollars in taxes out of the economy, Pennsylvania would have ranked 19th in the nation in job growth (with 103,640 new jobs) instead of ranking in the bottom half of the country (with only 70,500 new jobs)? Historical experience and economic evidence suggest that would have been the likely outcome.

Like your Personal Income Tax increase, a minimum wage is just another tax on jobs and an additional cost of doing business in our state. It is not mere coincidence that 10 of the 11 states which increased their minimum wage above the federal level prior to 2004 had slower job growth rates following the increase than before the artificial hike in labor costs. True, those states still experienced increases in jobs, but you ignore the important question of how many more jobs would have been created if those states had not increased the minimum wage at all.

But let’s assume that raising the minimum wage “does not have a negative effect on state economies,” as you claim. Then why are you only proposing a $2 increase? Why not $15 or $20 per hour? Heck, why not set it equal to the Major League Baseball minimum wage of $327,000? The answer is obvious. Even you understand that raising the minimum wage does indeed have negative economic consequences.

What is most unfortunate, however, is your choice to ignore the numerous economic studies showing that raising the minimum wage reduces employment among low-skill and least-educated workers—the very people you are purporting to want to help. Here’s just one recent example for you to consider.

In June 2004, the City of Santa Fe, New Mexico increased its minimum wage on all businesses employing more than 25 people to $8.50 per hour—an increase of 65%. The wage floor increased to $9.50 in 2006 and is scheduled to increase again to $10.50 in 2008.

Research conducted by Dr. Aaron Yelowitz of the University of Kentucky found that the negative effects of the wage hike were concentrated on the very workers the increase was intended to help. Dr. Yelowitz found that the likelihood of unemployment for all employees in Santa Fe went up by 3.3% and the average weekly work time declined by 1 hour. However, the likelihood of unemployment for low-educated workers was even higher at 8.3%, while their work time fell by 3.2 hours per week.

Furthermore, there are reports that the high school dropout rate is increasing in Santa Fe, as students are lured away from the classroom to what appear to be good-paying jobs—for the time being at least. Tell me, what are the chances that these same kids will eventually end up in the welfare system as adults because they failed to get an education? Awfully high; and I’m sure you would agree with that.

In conclusion, Governor Rendell, I challenge you to tell me another way in which Pennsylvania’s job creators will deal with your artificial increase in labor costs. I can only identify three; and none of them are good. Business owners can:

1. Absorb increased costs by reducing profits (which is difficult for most small businesses already operating on thin profit margins); or
2. Pass along increased labor costs to consumers through higher prices; or
3. Reduce full-time jobs to part-time jobs, eliminate jobs entirely, or reduce/eliminate benefits such as health care. (And who will be the first employees affected by these changes? You and I both know it will be the least-skilled and least-educated citizens among us.)

This is the economic reality of minimum wage politics. Despite reports to the contrary, Governor, money doesn’t grow on trees along the Susquehanna River, nor are Pennsylvania’s small businesses experiencing large profits or wallowing in extra cash. Most job providers are struggling just to make payroll.

So we stand by our projected loss of 10,000 jobs and the $262 million hit to our economy. Yes, Pennsylvania’s job creators will continue to adapt to our declining business climate, and they will likely end up producing more jobs overall in 2006—albeit slower than the rest of the nation. But how longsuffering do you expect them to be?

Governor Rendell, little has improved since 2002 when you pronounced that “Pennsylvania businesses carry a very high tax burden compared to states we compete with.” In fact, the burden of government has only gotten heavier.

So I encourage you to set aside what appears to be good re-election politics, remember what Candidate Rendell said, and do not “add another premium for doing business in [our] state.”

Sincerely yours,

[signed]

Matthew J. Brouillette
President & CEO

P.S. I’m sure I don’t need to remind you that the Commonwealth Foundation stood with you and praised you when you pursued good, sound public policy—even when it wasn’t politically popular in the Capitol. And we would do so again, despite your erroneous criticism of our research on the negative impact of raising the minimum wage in Pennsylvania. I just hope we get the chance.

cc: Members of the Pennsylvania General Assembly
Pennsylvania Media