Policy Brief: The Impact of a $10.10 Minimum Wage in Kentucky

Policy Brief: The Impact of a $10.10 Minimum Wage in Kentucky

Kentucky House Speaker Greg Stumbo recently introduced legislation to raise the state’s minimum wage from $7.25 to $10.10 an hour. Stumbo and other proponents argue that a minimum wage increase will, on net, be a benefit for Kentucky employees. But the evidence, including a new analysis specific to Kentucky, shows that a wage increase delivers results that are far different than these claims.

In a 2014 study, the nonpartisan Congressional Budget Office (CBO) tossed cold water on the unsupported idea that new mandates on low-margin employers won’t carry consequences. The CBO, which is cited as an expert by both Republicans and Democrats, estimated that a half-million jobs would be lost nationwide should a $10.10 minimum wage take effect.

The CBO based its estimates on the results of dozens of peer-reviewed academic studies on the jobs impact of a higher minimum wage, including the latest and most up-to-date research. In December 2015, the Federal Reserve Bank of San Francisco released a report summarizing that research which concluded that recent minimum wage increases have caused a reduction in 100,000 to 200,000 jobs nationally.

In this analysis, Drs. David Macpherson of Trinity University and William Even of Miami University use Census Bureau data to replicate the CBO methodology to determine how many of those jobs would be lost should Kentucky raise its minimum wage to $10.10. They also examine the family composition and household income of affected employees, to determine if the wage increase would be well-targeted to families in poverty.

Impact on Employment

According to the Bureau of Labor Statistics most recent report on minimum wage workers, approximately 56,000 people in the state earn at or below the federal minimum wage of $7.25. Drs. Even and Macpherson estimate that approximately 193,000 employees in Kentucky would be impacted by the proposed minimum wage change to $10.10. Following the CBO methodology, they estimate that roughly 5,000 jobs would be lost in the state. The policy would disproportionately impact women, who represent roughly 64 percent of the jobs lost, and teens, who make up roughly 39 percent of the jobs lost.

A primary focus for proponents of raising the minimum wage is reducing hardship for families in poverty. However, a study of the 28 states that raised their minimum wages between 2003 and 2007 found little associated reduction in poverty. The authors suggested that the increases were not well-targeted to families in poverty.

In Kentucky, the data suggests that a similar problem exists. Eleven percent of affected employee are single parents; in total, roughly 9 percent are single earners with families. By contrast, nearly 60 percent either live with family, or are secondary earners where both spouses work. Because so many minimum wage earners live in households where they’re either a second- or third- earner, the average family income of a beneficiary in Kentucky is nearly $45,000 per year.

Better Alternatives

While the empirical research suggests that a higher minimum wage is an ineffective means to reduce poverty, the verdict on state supplements to the federal Earned Income Tax Credit (EITC) is much different. One recent study from economists at San Diego State University and the University of Georgia found a one percent reduction in a state’s poverty rate for each one percent increase in its supplement to the EITC. While many of Kentucky’s neighboring states offer a state supplement to the federal Earned Income Tax Credit (EITC), Kentucky does not. Creating a credit like this is a better place for the state to start if it’s truly interested in reducing poverty.

A note on the methodology

This analysis relies on Census Bureau Current Population Survey data from January 2013 to December 2015. It follows the methodology that the CBO detailed in an appendix to its 2014 report. The analysis assumes that workers in 2013-2015 would realize wage growth of 2.9 percent until implementation of the $10.10 minimum wage. It also assumes that workers in 2015 who earned between the 2014 and 2015 minimum wage would have a wage increase to the new minimum.

Workers affected by the $10.10 minimum are those with wages in 2015 that are between the state minimum for 2015 (and up to $.25 below the minimum) and $10.10. Hourly wage is the reported hourly wage for hourly workers, but it’s measured as weekly earnings divided by weekly hours for non-hourly and workers who report receiving tips, overtime, or commissions. The analysis accounts for employees affected by separate legislated increases in Lexington, KY, and Louisville, KY.