Impact Of Raising The Minimum Wage In South Dakota

A STUDY OF THE IMPACT OF RAISING THE

MINIMUM WAGE IN SOUTH DAKOTA: 2007 UPDATE

INTRODUCTION

This report represents an update of a report prepared for Governor Michael Rounds in January 2006. At that time, Governor Rounds had proposed an increase in the minimum wage in South Dakota from $5.15 per hour to $6.00 per hour starting July 1, 2006. That bill did not pass the Legislature. This year, 2007, Governor Rounds has proposed an increase in the minimum wage that would mirror the minimum wage bill that passed the U.S. House of Representatives in January of 2007. This minimum wage bill would increase the current minimum wage of $5.15 per hour to $7.25 per hour in three seventy cent increments. The first increase would be to $5.85 per hour within 60 days of the enactment of the bill, to $6.55 per hour one year later (2008), and to $7.25 per hour one year later (2009).

The current minimum wage in South Dakota is $5.15 per hour and has been at this level since 1997. Prices increased by 26 percent between 1997 and 2006, and this reduced the real minimum wage to $4.10 in 2006 purchasing power. Governor Rounds’ new proposal would raise the South Dakota minimum wage from $5.15 per hour to $7.25 per hour following the Federal law timetable.

An increase in the minimum wage is often controversial with both sides providing

arguments supporting their position.

Proponents argue that a higher minimum wage will:

1. directly benefit low-wage workers by increasing their income,

2. reduce poverty,

3. stimulate the economy by increasing the purchasing power of low-wage

workers,

4. provide greater equity and fairness.

Opponents of a higher minimum wage argue that it will:

1. reduce employment by pricing some low-skill workers out of the labor market,

2. raise barriers to people with little or no work experience to find the initial job that would provide experience and on-the-job training that would allow them to earn higher wages,

3. increase the cost of labor to businesses,

4. lead to higher prices as businesses attempt to cover higher costs through higher

prices.

The purpose of this paper is to study the probable impacts of a higher minimum wage in South Dakota. Both benefits and costs of a higher minimum wage will be studied and quantified. As in all policy changes, there is the matter of tradeoffs where there are benefits and costs of the new policy. It is the intent of this study to provide policymakers with information about the benefits and costs of a higher minimum wage in South Dakota.

WHO WORKS AT THE MINIMUM WAGE RATE?

The Fair Labor Standards Act establishes the federal minimum wage and overtime pay affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. The federal minimum wage was first set at $0.25 per hour in 1938. Over the years it has been increased and since September, 1997 it has been $5.15 per hour. The South Dakota minimum wage has also been $5.15 per hour since 1997.

I. COVERAGE

According to the U.S. Department of Labor, there are two ways that an employee can be covered by the law: enterprise coverage or individual coverage. Covered enterprises include:

Employees who work for certain businesses or organizations (or "enterprises") are covered by the

FLSA. These enterprises, which must have at least two employees, are:

(1) those which do at least $500,000 a year in business

(2) hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies. Individual coverage includes:

Even when there is no enterprise coverage, employees are protected by the FLSA if their work regularly involves them in commerce between States ("interstate commerce"). In its own words, the law covers individual workers who are "engaged in commerce or in the production of goods for commerce."

Examples of employees who are involved in interstate commerce include those who: produce goods (such as a worker assembling components in a factory or a secretary typing letters in an office) that will be sent out of state, regularly make telephone calls to persons located in other States, handle records of interstate transactions, travel to other States on their jobs, and do janitorial work in buildings where goods are produced for shipment outside the State.

Also, domestic service workers (such as housekeepers, full-time babysitters, and cooks) are normally covered by the law.

II. WORKERS RECEIVING TIPS

Workers receiving tips are also covered by the minimum wage. According to the Labor

Department:

An employer of a tipped employee is only required to pay $2.13 an hour in direct wages if that amount plus the tips received equals at least the federal minimum wage, the employee retains all tips and the employee customarily and regularly receives more than $30 a month in tips. If an employee's tips combined with the employer's direct wages of at least $2.13 an hour do not equal the federal minimum hourly wage, the employer must make up the difference.

Some states have minimum wage laws specific to tipped employees. When an employee is subject to both the federal and state wage laws, the employee is entitled to the provisions of each law which provide the greater benefits.

III. THE DATA

The three different levels of the proposed new minimum wage as phased-in are:

1. $5.85 per hour 60 days after enactment of law (2007),

2. $6.55 per hour 12 months after enactment of law (2008),

3. $7.25 per hour 24 months after enactment of law (2009),

Data on the distribution of low-wage workers in South Dakota in 2005, based on the

Occupational Employment Survey, was supplied by the Labor Market