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F I S C A L I M P A C T R E P O R T

SPONSOR HBIC

ORIGINAL DATE

LAST UPDATED

1/24/06

2/9/06 HB CS/258/aHFI#1/aHFI#2

SHORT TITLE Increase State Minimum Wage

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

See Narrative

(Parenthesis ( ) Indicate Expenditure Decreases)

Conflicts with SB 449, SB 746, SB 462

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY06

FY07

FY08 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

(21.8) (89.0)

(110.8) Recurring GF: State Per-

sonnel Office

Total

279.6

690.3

969.9 Recurring GF: Jury and

Witness Fee

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

NM Department of Labor (NMDOL)

Responses Received From

NM Department of Labor (NMDOL)

Department of Corrections (DC)

Human Services Division (HSD)

Office of the Courts (OC)

Economic Development Department (EDD)

SUMMARY

Synopsis of HFl#2 Amendments

There were two amendments on the house floor. The first was to refine the definition of “food

House Bill CS/258/aHFl#1/aHFl#2 – Page

2

processor” and require the director of the Department of Labor to report biannually on the effec-

tiveness of the training wage on job turnover. The second was to remove the exemption for state

and local government employees who are now exempt from the statewide minimum wage.

The definition of “food processor” was included in the substitute as any employer who is en-

gaged in handling, drying, packing, processing, freezing or canning of any agricultural or horti-

cultural commodity in its unmanufactured state. In the original food processor was not defined.

The second amendment extends the statewide minimum wage to state and local governments as

well as private industry.

Synopsis of HBIC Substitute

The House Business and Industry Committee substituted HB258 with a new phase-in schedule

for the minimum wage, exemptions certain employees, establishment of a methodology for infla-

tion adjustment, a training wage and prohibition on local governments from establishing a higher

minimum wage unless already enacted.

The new wage phase-in is over two years. Beginning January 1, 2007, the minimum wage in-

creases to $6.75 and beginning January 1, 2008, the wage increases to $7.50 per hour. It will in-

crease in multiples of 5 cents in 2009 and subsequent years by the lesser of 3 percent or the an-

nual change as reported in August of each calendar year of the consumer price index for all ur-

ban consumers

The training wage is set at $5.15 per hour or the federal minimum wage, whichever is higher.

The employer is barred from displacing a current worker with a worker hired at the training

wage. If the employer is found in violation by the Department of Labor, the employer will not

be allowed to use the training wage for any employee.

The exemption for non-profits serving mentally retarded or developmentally disabled was ex-

panded to include all non-profits.

All local governments will be prohibited from enacting a minimum wage that is higher than the

statewide minimum wage unless there is already an ordinance in effect.

FISCAL IMPLICATIONS

Fiscal impacts for the minimum wage are difficult to determine. On the one hand, employees

who receive an increase because they have wages that are less than $7.50 will generate more in-

come tax revenue and more gross receipts tax revenue as they spend their extra income. Also, if

they previously qualified for benefits targeting low income workers, these benefits may decline,

lowering the state’s appropriations. On the other hand, if employers feel they have to reduce

their workforce, then those employees who are laid off will be paying less tax due to their re-

duced income and likely need more publicly provided benefits. In the next section there is more

detail on the economic effects of increasing the minimum wage.

The Administrative Office of the Courts reports that the jurors are paid the state minimum wage

for service. Increasing the minimum wage will increase the payments to jurors by $279.6 thou-

House Bill CS/258/aHFl#1/aHFl#2 – Page

3

sand in FY07 and $690.3 thousand in FY08.

1

After FY08, the cost will increase with the CPI

indexed wage.

Fiscal Impacts of Amendment to Include State and Local Government

HSD reports that their clients will most likely benefit from the increase in the wage. Even though

food stamp recipients may see a decline in their benefit, the reduction in benefits will be more

than matched by the increase in earnings. They report that the starting wage at HSD is over $8.00

per hour and so there will be no impact due to the amendment.

Department of Corrections report they have no employee who is paid less than $7.50 per hour

and so the repeal of the exemption stipulated in the amendment will have no fiscal impact.

The State Personnel Office:

Data compiled are estimates based on current salaries, excluding temporary employees.

•

A new appropriation of $21,782 will be needed for FY07 to bring classified em-

ployees up to $6.75 an hour.

•

A new appropriation of $45,413 will be needed for FY08 to bring classified em-

ployees up to $7.50 an hour in addition to recurring costs needed for FY08 of

$43,564.

According to the UNM Bureau of Business and Economic Research, state and local government

employment is expected to be 177.5 thousand in FY07 and 181.3 thousand in FY08. This repre-

sents approximately one-fifth of the non-agricultural employment in New Mexico. It should be

noted that local government includes tribal government which are still exempted from the mini-

mum wage law.

There are also likely to be impacts on all local governments, institutions of higher education and

school districts to the extent that they have employees below the proposed wage.

SIGNIFICANT ISSUES

1. Employment Impacts. The bill will directly affect approximately 5,400 businesses, or 11

percent of all businesses, and several tens of thousands of employees. The table shows employ-

ees working in the most affected industries, but not all of them, will not be affected as many are

already at or above the proposed wage. Most of the industries are service and retail trade related,

which are typically low-wage, low-skill industries. As the table shows, the median wage (the

wage at the midpoint of the distribution or at the 50

th

percentile) for food preparation and serving

related occupations is $6.64 per hour. The average or mean wages of these industries are signifi-

cantly below the statewide average of $14.52 per hour.

Table 1: Occupations with at least 10 percent of employees at less than $7.50 per hour

Occupation

Employment

Mean

Wage

Hourly

Wage 10

th

Percentile

Hourly

Wage 25

th

Percentile

Hourly

Wage (50

th

Percentile)

Food preparation and serving re-

lated occupations

72,410 $7.36 $5.57

$5.97

$6.64

Farming, fishing, and forestry occu-

pations

4,130 7.40

5.60

5.95

6.54

1

LFC analysis based on OAC data provided for previous analyses of the minimum wage.

House Bill CS/258/aHFl#1/aHFl#2 – Page

4

Building and grounds cleaning and

maintenance occupations

29,710 8.79

5.85

6.69

8.08

Personal care and service occupa-

tions

23,150 9.01

6.07

7.16

8.80

Sales and related occupations

77,390 12.47

6.02

7.14

9.50

Healthcare support occupations

20,310 10.26

7.03

7.95

9.56

Transportation and material moving

occupations

45,050 13.14

6.31

7.92

10.98

Arts, design, entertainment, sports,

and media occupations

6,740 17.08

6.61

9.46

14.56

Office and administrative support

occupations

120,510 12.29

7.16

8.89

11.32

Production occupations

31,960 13.37

6.9

8.53

11.36

Source: LFC analysis of NMDOL Data

The current law exempts many types of employees including state and local employees and high

school students. This bill does not revise the definition of employee so those exemptions remain

in tact. Even though these exemptions exist, there is considerable evidence that once a minimum

wage is established, employers find it difficult to either find qualified employees to work for less

than the minimum or divide their workforce between exempt and non exempt employees (ie,

paying high school students less than other employees simply because they are exempt).

2. NMDOL Statistics on Directly Affected Workers

•

Number of workers: 123,000 (13.5 percent of the workforce)

•

43.5 percent male, 56.5 percent female

•

34.6 percent white, 49.7 percent Hispanic

•

82.4 percent older than 20 years

•

59.7 percent work more than 35 hours per week

•

49.3 percent in retail trade or leisure and hospitality

•

58.3 percent in a sale/service occupation

Percent of Workforce Below $7.50

13.5%

12.2%

16.4%

0.0% 5.0% 10.0% 15.0% 20.0%

New Mexico

Metro Areas

Rural Areas

3. Economic Theory. The impact of raising the minimum wage on employment is a hotly con-

tested issue amongst economists. Conventional theory states that an artificial floor for any price

is a market distortion and so will lead to an imbalance in the market, in this case dis-

employment. Most economists believe that increases in the minimum wage cause unemploy-

ment amongst some groups, particularly low skilled and younger workers. At issue, then, is not

whether there is unemployment but how significant is the unemployment that is caused by the

House Bill CS/258/aHFl#1/aHFl#2 – Page

5

wage increase and how is it offset by other positive impacts. The key to the argument is the elas-

ticity of the demand for labor. In other words, how employers respond to changes in the wage.

At very low wage levels near the federal minimum, there is evidence that employment is not sig-

nificantly impacted by small changes in the wage.

The market wage is where supply of labor equals demand for labor and the market clears. If the

market wage is higher than the minimum, the effects of the minimum wage will be on the mar-

gins and therefore not likely to be significant. If the natural wage is lower than the minimum

wage, supply of labor will exceed demand for labor and unemployment will result. The average

wage, which is a rough proxy for the natural wage, in most industries is significantly above the

current minimum wage and the proposed wage and so there will be little to no employment im-

pact.

One way to assess the real impact of a minimum wage is to look back on previous minimum

wage hikes to see if there were significant impacts on employment. In 1997, for example, the

federal minimum wage was increased to $5.15 but the economy was at the beginning of a boom

where all levels of workers, including low skilled and unskilled, enjoyed employment and wage

gains. Studies of the 90-91 federal minimum wage increase found no measurable impacts on

employment. One of the arguments is that by the time political pressure mounts to actually in-

crease the minimum wage, the economy has largely moved on without the legislation and the

new minimum wage is merely increased to the new floor wage rather than increasing the floor

wage.

One concern of businesses that pay wages around the proposed minimum wage is that when a

new floor is set by raising the minimum wage, current employees’ wages who are paid at or near

that new level will need an increase. This will increase the costs to business even more than just

the hiring of new people at the new wage. A University of California-Berkeley Institute of In-

dustrial Relations study in September 2005 on their minimum wage indicated that the impact on

business was similar for the indirect impact of wage increase for employees currently at or near

their minimum wage. However, they also indicate that the combined impact is estimated to in-

crease business operations costs by 1.3 percent.

4. Real Minimum Wage. The real minimum wage, shown in Figure 1 as the solid line, is lower

in 2005 than it has been since the 40s. Adjusted for inflation using the CPI-W index from the

Bureau of Labor Statistics, the real minimum wage has averaged $6.50 since 1938, significantly

higher than the current federal minimum wage of $5.15. Figure 2 shows the real and nominal

average private sector hourly wage. Here the real wage has been fairly consistent over time.

House Bill CS/258/aHFl#1/aHFl#2 – Page

6

Figure 1: Real and Nominal Minimum Wage

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Nominal $

December 2004$

Source: BLS; Real Wage adjus ted by CPI-W

Figure 2: Real and Nominal Average Private Hourly Wage

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Nominal $

December 2004$

Source: BLS; Real Wage adjus ted by CPI-W

RESOURCES ON THE WEB FOR MORE INFORMATION

National Resources:

US Department of Labor www.dol.gov/esa/minwage/america.htm

Economic Policy Institute www.epinet.org

Employment Policy Institute www.epionline.org

Policy Almanac www.policyalmanac.org/economic/minimum_wage.shtml

US Chamber of Commerce www.uschamber.com

ACORN www.livingwagecampaign.org

Local Resources:

New Mexico Voices www.nmvoices.org

Association of Commerce and Industry www.aci.nm.org

PERFORMANCE ISSUES

The Administrative Office of the Courts reports that some of their performance measurements

may be affected if the increased wage interferes with their ability to conduct jury trials effec-

tively.

House Bill CS/258/aHFl#1/aHFl#2 – Page

7

ADMINISTRATIVE ISSUES

The Administrative Office of the Courts indicates that the Jury and Witness Fee Fund is not suf-

ficient to absorb the increase in payments to jurors and will seek supplemental funding for the

fund.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Tipped Employees

2007 2008 2008

Local Pre-

emption Minimum Tips/Month

Other

CS/HB258/aHFI#1/

aHFI#2

$6.75 $7.50 $7.50 Yes

$ 2.13 $ 30.00 Exemptions for

certain employees;

Training wage;

state and local

government not

exempt

SB449/aSCORC 5.75 6.00 6.15 Yes

2.13 30.00 Training Wage

SB462

7.50 7.50 7.50 No

3.10 30.00 Busines Credit

SB746

6.00 6.50 7.00 Yes

2.13 30.00 Training Wage and

health insurance

credit

NF/mt:yr