Minimum Wage in South Dakota Table of Contents

October 27, 2014

Minimum Wage in South Dakota Table of Contents Introduction 2-3 Demographics 3-9 Current Population Survey 3 Occupational Employment Statistics... 4 Estimates Delivery System. 4-5 Part- Time Workers.. 5 Wait Staff.. 5-6 OES by Industry... 6 OES by Region. 7 CPS by Age Group.. 8 CPS by Educational Attainment 9 Summary.. 9 Minimum Wage Studies 10 Comparing States.. 11-13 Conclusion 14-15 1

I. INTRODUCTION Initiated Measure 18 would raise the minimum wage from $7.25 to $8.50 per hour on January 1, 2015. The initiative would also increase the minimum wage each year thereafter (presumably on the first day of the year) based upon the Consumer Price Index published by the U.S. Department of Labor. If the cost of living decreases according to the Department, the minimum wage cannot be decreased. In addition, the initiative would make the hourly minimum wage for tipped employees half of the minimum wage. That would increase the current minimum wage for tipped employees from $2.13 (which is less than half of the current minimum wage) to $4.25 per hour. Over the last decade, the average difference in CPI for the Midwest Urban Region from year to year has been about 2.3 percent. If patterns of the CPI remain relatively the same over the next few years, we can expect yearly increases to be close to the estimates shown in Figure 1. Estimated Increase by Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 $8.50 $8.70 $8.90 $9.10 $9.31 $9.52 $9.74 $9.96 $10.19 $10.42 Figure 1: Estimated increase based upon the CPI for the Midwest Urban Region Below is a line chart representing the history of minimum wage in the U.S. The blue line represents the federal minimum wage level from the initial imposition in 1938 to today. The red line on the right side of the chart represents the increases proposed for South Dakota by the initiated measure (and the blue line under the red line assumes the federal rate stays the same). $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Minimum Wage Increases in the U.S. by Year Figure 2: U.S. Department of Labor s Wage and Hour Division, History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 2009 2

All throughout its history, South Dakota has mirrored the federal minimum wage law. II. DEMOGRAPHICS 1 Current Population Survey Figure 3 below reflects the 2013 CPS estimate of 12,000 South Dakotans who earn the minimum wage or less per hour, which equates to approximately three percent of the May 2013 annual average CPS estimated South Dakota employment level of 402,990. Minimum Wage Earners In SD At Or Below Minimum Wage 3% Above Minimum Wage 97% Figure 3: 2013 Current Population Survey, conducted by the U.S. Census Bureau for the Bureau of Labor Statistic, U.S. Department of Labor. It is often overlooked that this does not include overtime pay, commissions, or tips received. It is likely that many of these workers earn this additional pay. Unfortunately, the CPS does not publish an estimate regarding the number of South Dakota residents employed as wait staff. This information would be helpful in determining how many workers earn the minimum wage when tipped income is accounted for. 1 Most of this section was compiled and written by Bernie Moran of the South Dakota Labor Market Information Center. 3

Occupational Employment Statistics The Occupational Employment Statistics (OES) is a sample survey of employers across the nation. The wage data is collected using specific wage intervals. Working with the two sets of data from the CPS and OES can become confusing. Figure 4 outlines the key differences between CPS and OES. Current Population Survey (CPS) Collects data by household Tips, commissions, bonuses are not included Workers are counted once, even those who work more than one job Earnings are classified by exact amounts The self- employed and salaried are not included in the minimum wage breakdown Occupational Employment Statistics (OES) Collects data from employers Tips, commissions, bonuses are included Workers may be counted more than once if they work more than one job Earnings are classified by intervals, not exact amounts The self- employed are not included Figure 4: Current Population Survey vs. Occupation Employment Statistics, administered by the Bureau of Labor Statistics Estimates Delivery System The OES data is utilized within the Estimates Delivery System (EDS), an application which provides the South Dakota Labor Market Information Center (LMIC) the capability to provide more in- depth analysis of occupational wage data. LMIC typically uses the EDS for creating wage estimates for more finite geographic areas (such as multi- county regions). 2 According to EDS 2013 wage estimates, 37,214 workers earn $8.50 per hour or less. Based on the EDS estimate and the 2013 OES estimated total number of workers in South Dakota (402,090), around 9.3 percent of workers earn $8.50 or less and would be impacted in 2015 by the suggested increase in the minimum wage. 2 For more details, the OES methodology available on the BLS website: http://www.bls.gov/oes/current/methods_statement.pdf 4

Figure 5: SD Labor Market Information Center, May 2013 The South Dakota Democrat Party estimates 62,000 South Dakotans will receive a raise if this ballot initiative passes. This number, which was calculated by Reynold Nesiba, economics professor at Augustana College, is a stark contrast to the estimated 37,214 workers earning $8.50 or less per hour provided by LMIC. Though it does not appear that Reynold Nesiba s methodology has been made public at this time, it is likely his estimate is based upon the idea of wage compression and that Nesiba assumes a large number of workers who earn more than $8.50 will see their wages ratchet up so they make more than the proposed minimum wage rate. Rather than predicate assumptions based on that theory, this report focuses on the known numbers of workers within the $8.50 per hour or less wage range. Part- Time Workers According to unpublished CPS data, there were an estimated 75,000 South Dakota residents working part- time during the July 2013 June 2014 time period. Some worked part- time for economic reasons (involuntary part- time), others for noneconomic reasons (voluntary part- time). Of the estimated 63,500 who work part- time for noneconomic reasons, 11,500 are ages 16 to 19, most of which work 34 or less hours per week. This correlates closely with the CPS estimate of 12,000 residents who earn the minimum wage or less per hour. Wait Staff CPS data does not publish an estimate of tipped workers, however the OES program does. The most common occupation which earns tipped income is wait staff, and according to the 2013 OES data, there is an estimated 7,660 wait staff in South Dakota. 5

Although the CPS and OES surveys incorporate different methodologies, the Labor Market Information Center (LMIC), South Dakota Department of Labor and Regulation, estimates most of the 12,000 workers reported by the CPS as earning minimum wage or less are wait staff. In addition, some retail and wholesale trade workers receive commissions based on their sales, which might also be a factor regarding the number of workers earning less than minimum wage as reported by the CPS. OES by Industry Utilizing the EDS, LMIC provides estimates by industry regarding the number of workers who earn $8.50 or less per hour. In South Dakota, the majority workers earning $8.50 or less per hour (39 percent) are employed within the Leisure and Hospitality industry super sector some of these jobs are temporary or seasonal. Trade, Transportation, and Utilities account for 31 percent of workers earning $8.50 or less per hours, followed by Education and Health Services, which account for 12 percent. Together, these sectors represent 82 percent of workers earning $8.50 or less. Leisure & Hospitality is comprised of the Arts, Entertainment & Recreation, and Accommodation & Food Services industry sectors. Trade, Transportation, & Utilities is comprised of the Wholesale, Retail, Transportation, & Utilities industry sectors. Education & Health Services includes the Educational Services and Health Care and Social Assistance sectors. 6

OES by Region The map below is a breakdown of the percentage of workers who make $8.50 or less by region. If IM 18 passes, the West and Central areas and the Rapid City MSA in South Dakota will be most affected. Figure 6: SD Labor Market Information Center, Estimates Delivery System, May 2013 7

CPS by Age Group Nationally, half of Americans who earn minimum wage or less are 24 or younger. The next age group which includes 25- to 34- year- olds accounts for almost a quarter of the minimum wage (and below minimum wage) earners. The rest (29 percent) are 35 and older. Nationally By Age Group 16 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65+ Figure 7: Bureau of Labor Statistics, Current Population Survey, 2013 8

CPS by Educational Attainment According to CPS data, 28 percent have not graduated from high school or received their GED. Most minimum wage earners (and those earning less) don t have a college degree. Around 28 percent have some college, but no degree. A very small amount (15 percent) have an Associate degree or higher. Nationally By Educational ASainment 6% 9% 28% Less than high school diploma High school graduates, no college Some college, no degree 28% Associate degree 29% Bachelor'ʹs and higher Figure 8: Bureau of Labor Statistics, Current Population Survey, 2013 Summary In summary, very few people earn the minimum wage or less in South Dakota and the workers earning $8.50 or less account for 10 percent of all workers in our state. It is likely that the majority of minimum wage earners work part- time and that many are employed as wait staff. Minimum wage earners are generally young and/or unskilled (lacking diplomas). Some minimum wage earners are likely high school dropouts or college dropouts, but by looking back at the age breakdown, it s reasonable to assume that a majority of these workers with less than a high school diploma or college degree are students. 9

III. Minimum Wage Studies The effects a minimum wage increase can have on the economy are often debated. Proponents say increasing the minimum wage greatly benefits low- wage workers by giving them a higher income and therefore reducing poverty. Some believe that an increase stimulates the economy by increasing the purchasing power of low- wage workers. Opponents, on the other hand, believe low- skill workers are priced out of the market every time the minimum wage is increased. An increase, they say, means higher unemployment and an increase to the cost of labor, which translates into higher costs. There are a plethora of academic studies on the minimum wage. A comprehensive breakdown of scholarly studies was conducted by David Neumark and William Wascher in their book Minimum Wages. Neumark (a professor at UC Irvine) and Wascher (senior associate director at the Federal Reserve) have studied the impacts of the minimum wage since the 1980s and have found that increasing the minimum wage reduces employment opportunities for less- skilled workers. In the 90s they reviewed more than 100 different academic minimum wage studies and found that two- thirds of those studies show evidence of negative employment effects of minimum wages. Only eight show positive effects on employment. More recently in 2010, Neumark and Wascher reviewed 33 studies those they considered to be the most compelling and found that more than 80 percent point to negative employment effects. Neumark and Wascher s findings are reinforced by the non- partisan Congressional Budget Office which recently assessed that half a million jobs would be lost nationwide if President Obama s proposed minimum wage increase to $10.10 were passed. Even some on the left are willing to concede that minimum wage increases cost states jobs. The South Dakota Budget & Policy Institute says hundreds of jobs will be lost in our state if Initiated Measure 18 passes. 10

IV. COMPARING STATES Twenty- three states have a minimum wage rate that is higher than the federal requirement. About half of those states increase their rates each year based on the cost of living. Raising the minimum wage by $1.25 would be a drastic increase even without the yearly cost of living increases. Relative to other states, the $8.50 is a very high minimum wage. If the $8.50 minimum wage were in effect now, South Dakota would have the sixth highest minimum wage in the nation; higher than New York, Massachusetts, Illinois, and 41 other states. The only states higher would be California, Oregon, Washington, Connecticut, and Vermont. Unemployment On average, states with minimum wage rates higher than the federal rate have higher unemployment rates and a higher cost of living than states that fall under the federal rate. States with a higher rate had a.8 percent higher unemployment than federal rate states. 6.4 6.2 6 Unemployment: Fed Rate States vs. Higher Min. Wage States 5.8 5.6 Unemp Avg 5.4 5.2 National Average States above federal rate States at federal rate Figure 9: Bureau of Labor Statistics, September 2014 Unemployment Rates with states divided by August 2012 minimum wages. 11

Regional Price Parity Along with having higher unemployment rates, states with higher minimum wages average higher Regional Price Parity rates. The latest Regional Price Parity numbers are from the year 2012. Below, states are divided by their minimum wage rates in 2011. States with a higher rate in 2011 had a Regional Price Parity average of 2.8 percent higher than the national average. Federal rate states were 1.5 percent lower than the national average, leaving the two sets of states with a difference of 4.3 percent. 106 105 104 103 Regional Price Parity: Fed Rate States vs. Higher Min Wage States 102 RPP Avg 101 100 99 National Average States above federal rate States at federal rate Figure 10: 2011 Min. Wage Rates by State According to US Dept. of Labor; Bureau of Economic Analysis RPP by State 2012 Numbers Though it s worth noting the unemployment and RPP differences between the sets of states, correlation does not necessarily amount to causation and there are many factors that contribute to a state s unemployment and cost of living. The economy is so complex that we cannot possibly predict all of the effects of a higher minimum wage or accurately measure and relate all of the effects on those states that have already gone down this path. 12

Regional Comparisons Below is a chart comparing South Dakota with its six adjacent states. Only Montana and Minnesota have a minimum wage that is higher than the federal rate. Compared to the others, Montana has the highest unemployment rate and lowest per capita personal income (PCPI), and has higher RPP than the average of the other states. Minnesota has relatively high RPP and unemployment, but does better than the state average in PCPI. South Dakota, in comparison, does fairly well compared to its neighbors in unemployment and RPP, and but not as well in PCPI though the state is less than $2,000 away from the regional average. Unemployment* Cost of Living** Per Capita Personal Income*** Minimum Wage Montana 4.6% 99.7 $39,199 $7.90 Wyoming 4.4% 102 $50,924 $7.25 Nebraska 3.6% 95.4 $46,033 $7.25 Iowa 4.5% 94.7 $45,114 $7.25 Minnesota 4.5% 103.1 $47,856 $8.00 North Dakota 2.8% 95.6 $57,084 $7.25 South Dakota 3.7% 93.3 $45,558 $7.25 Average 4.0% 97.7 $47,395 SD'ʹs Regional Ranking Montana s Regional Ranking Minnesota s Regional Ranking 3rd 1st 5th 7th 5th 7 th 6th 7th 3 rd Figure 11: *Bureau of Labor Statistics, July 2014 **Bureau of Economic Analysis, 2012 ***Bureau of Economic Analysis, Personal Income Summary 2013, http://www.bea.gov/itable/index_regional.cfm 13

V. CONCLUSION Overall, an increase of the minimum wage to $8.50 would be bad for businesses and bad for South Dakotans. The worst part of Initiated Measure 18 is the yearly cost of living increase. Despite the size of a business, number of employees, specific job functions, or how that business is doing, they will all have to observe the increase. It s not clear how or if all of our small businesses could weather that storm. Even the initial increase to $8.50 would be a dramatic increase relative to other states. If the $8.50 minimum wage were in effect now, South Dakota would have the sixth highest minimum wage in the nation; higher than states like New York, Massachusetts, and Illinois. The only states higher would be California, Oregon, Washington, Connecticut, and Vermont. Increasing the minimum wage would give pay increases to a few South Dakotans seemingly making them better off. But those mandatory pay raises would make more people in our state worse off because increasing the minimum wage is not without its costs, and those costs will materialize elsewhere over time potentially creating a higher unemployment and a higher cost of living over the next few years, as the states with higher minimum wages average. Nationally, over half of those earning the minimum wage or less are age 24 or younger. Twenty- eight percent have not graduated high school and 85 percent have not completed any type higher education program. About 11,500 teenagers, ages 16 to 19, work part- time for non- economic reasons. Given this data, it is likely that many of our minimum wage earners are high school and college students. Students are not primarily in need of higher wages, but of experience. By increasing the minimum wage, less of those young people will receive the experience they need because some employers won t be able to pay higher wages for the quality of the work they can provide. Most importantly, employers should decide how much they pay their employees. They know their revenue and expenses better than the Democratic Party and better than state government or the voters, and they have to make decisions based upon those budgets. An increase could push some of those businesses particularly small businesses in small towns over the edge. Some could go out of business. Or, businesses that are cutting it close already may have to cut hours or cut jobs, or they ll have to charge more for their services. They may not be able to give raises to the people who truly deserve them they won t have as much of an ability to reward hard work. Things are going well in South Dakota. We have the second lowest unemployment rate and one of the lowest costs of living (RPP) of all the states. Our taxes are reasonable, our budget is balanced, and we have more jobs today than we ve ever had before. We re a state of small businesses. 14

The Democrat Party and the unions want to change South Dakota, to make us more like other states. The forces behind the initiated measure assume that we are under a system where you cannot make your way up, where if you re not born into it, it s not likely that you ll succeed on your own. They fail to mention that those who make the minimum wage don t usually stay at that rate for long. They refuse to recognize that the free market is the most beneficial to those who make less or are less fortunate. They do not realize that South Dakota s business friendly environment leads to more prosperity for more people. South Dakota is exceptional. Increasing the minimum wage would make our state less exceptional, less prosperous, and more like status quo states. We don t want to be like California or New York or Connecticut or New Jersey we want to continue to be the place to live, work, and do business. We want life to continue to be good here. 15