Episode 84: Minimum Wage Increases Threaten Nevada’s Economy

Rebekah Paxton: In California, on the East Coast you know, any of these states that have fully eliminated their tip credit and keep ratcheting up the minimum wage, typically employees are the ones that are fighting these laws.

Michael Schaus: This is Free to Offend. I’m your host, Michael Schaus. Minimum wage just went up in Nevada in case you didn’t realize it. We are at $11 something an hour. We’re going to be $12 an hour by next year. And while that certainly sounds high, I’ve got to tell you it’s not as high as some places. New York was talking about $20 minimum wage. Bernie Sanders is talking about $17 federal minimum wage. I think about what that would do if that was implemented overnight.

The minimum wage topic is something that we’ve been dealing with here in Nevada for years. We’ve been dealing with it nationally for years. And it’s only going to become more intense. People are going to be pushing for it harder than ever in the years ahead because look at where we are economically. People are struggling with inflation; they’re struggling with housing costs. They’re struggling in their daily life. We are seeing the cost of everything go up.

And that is putting financial pressure on everybody, especially folks who are at the lower end of the economic scale. And as a consequence, when a politician comes out and says, “Hey, I want to increase your wages,” they’re going to get attention. They’re probably going to get good attention from both the media and from folks who don’t really think about what the economic consequence of a government mandating a higher minimum wage could be on their profession, their industry, or just the general economy around them.

So, to talk a little bit about that, I’m very happy to welcome Rebekah Paxton, Research Director for the Employment Policies Institute, which is a fantastic organization.

They talk a lot about minimum wage and especially a little aspect of the minimum wage that I don’t think is talked about enough, and that is the tipping credit and the tipping system here in the United States when it applies to tipped workers such as waiters, waitresses, or so much of the hospitality industry that we have here in the state of Nevada.

So, Rebecca, thank you so much for joining us today.

Rebekah Paxton: Thank you so much for having me. I’m excited to have this discussion.

Michael Schaus: On July 1st, we just saw the minimum wage here in the state of Nevada go up yet again. It’s on its way up to $12 an hour. That never seems to be good enough for some folks.

They’re always fighting for more nationally. Of course, you got people like Bernie Sanders arguing for a $17 minimum wage. First let’s start just kind of culturally, and we can even talk nationally. Why is there such a drive? How come so many people still look at the minimum wage and say, “Hey, if we just upped that, we’ll eliminate poverty.”

Why is that such a selling point to so many folks?

Rebekah Paxton: Well, you know, I think it’s a good political talking point. Obviously, it sounds good, right? Raising wages is something that theoretically we all want to be in favor of. Unions, quite frankly, have been behind this push for a while.

The Service Employees International Union started this fight for $15. Again, it sounds really good. It sounds like a good campaign. And so, they’ve kind of pushed this narrative that $15 is the floor for the minimum wage, and now that’s sort of changed.

You know, you see politicians like Bernie Sanders and other state politicians across the country who are saying, well, “$15 isn’t enough. You know, now we have inflation. Now we’ve recovered from Covid.” And they’re sort of pushing for higher numbers.

While in fact, you know, the research shows, and I’m sure we’ll get into it, that minimum wages can contribute to inflation as well. So, it’s sort of a chicken or the egg scenario. But in terms of political talking points and political capital, it’s great for politicians to be able to say they want to raise the minimum wage.

Unfortunately, like you said, they’re not really taking into consideration how it actually affects workers on the ground, especially those workers who are relying on tips, which are adversely affected when we’re raising the minimum wage arbitrarily.

Michael Schaus: And we get into, you know, just economic reality.

Fine, we raise the wage to $12 an hour here pretty soon in Nevada. And I’m sure that it’s probably going to go up just knowing how we’re trending politically. Let’s say that it goes up to $15 or $17 or $20. At some point, businesses will say, “Okay, fine. I have to pay that. We’re going to start cutting hours. We’re going to make people part-time, so that way we don’t have to do benefits. We are going to hire fewer people. And if I’m going to be paying somebody $15 or $20 an hour, I’m going to expect more work for them.”

As a result, we’ve seen in areas throughout the country where the economic benefits that are promised by the politicians pushing this stuff haven’t really panned out, right?

Rebekah Paxton: That’s absolutely the case. And you mentioned a lot of the economic fallout that we talk about quite a bit. You know, it’s not just scare tactics. Economists have studied this for decades. Employers might be laying folks off outright. They might be reducing scheduled hours, so forcing people to go part-time when they don’t necessarily want to. That cuts into their healthcare eligibility and other benefits, and even stock options for certain companies that offer that. It affects employees being able to work the way that they want to and earn their wages the way that they want to. So, it not only affects employers, but it directly affects those employees.

There are studies now that this may increase homelessness. This may contribute to inflation. So, the economic fallout is well-documented across the economic research. Employees are speaking up, especially related to tips because this directly affects tipped employees.

Once the minimum wage goes up, customers don’t feel the need to tip as much. Menu prices have to go up, whether that’s in restaurants or whether prices have to go up in retail or other hospitality businesses. Customers are affected and that’s going to affect their behavior in terms of tipping employees.

Michael Schaus: I want to get to tipping specifically here in a second. But before we do, we were mentioning the kind of political reality of this. It sounds good when a politician comes out and says, “Hey, I want to raise everybody’s wages.” I think part of the problem is that the folks who are concerned about the economic fallout, one of the, one of the obstacles that they have is a very political kind of PR problem.

If you come out and say, “Hey, look, we can’t be raising the minimum wage because here are all the horrible things that are going to happen as a consequence.” And people say, “Well, look, I’m making, $11 an hour. I can’t pay rent right now. What are you going to do?”

Is there a way that folks who are concerned about the economic fallout can describe this a little bit better or explain a little bit better and maybe offer something that looks like a solution to these folks who are struggling financially as we’re facing inflation and economic uncertainty?

Rebekah Paxton: Absolutely. And you bring up a great point, right? There’s the very real problem of inflation that’s happening right now, four-decade high inflation across the country.

Employees are certainly feeling that. Consumers are also feeling that. And so, it’s something that hits close to home. Especially when minimum wages are on the ballot and voters are deciding on it, they don’t want to take away from other workers’ ability to be able to earn more.

I think one of the things that we have to remember is statistically the minimum wage actually doesn’t affect a large subset of what we call the working poor. So, folks who are actively in the workforce, actively working and they’re still below the poverty line. I think it’s about 18% of all minimum wage earners are either married sole earners in their household or single parents.

There’s this narrative that raising the minimum wage is going to affect single parents mostly. The studies have shown that’s actually not the case. A lot of economists have taken a look at what’s the best policy to alleviate poverty at the state level and at the federal level.

It turns out raising the minimum wage, because of these job loss effects and causing earnings decline and hours decline for employees that get to keep their jobs amid minimum wage hikes, there’s actually this trade off that some folks actually get plunged into poverty as a result of minimum wage hikes.

So, they’re not the most effective at targeting those workers that need the wage boost the most. And so there are other alternatives, right? A lot of economists will cite the earned income tax credit to boost wages for folks who are already working but may not be able to get by. Expanding the welfare safety net for folks to be able to get access to services and products that they need and maybe can’t afford on their wages.

So, I think we have to expand the discussion a little bit to talk about all the resources that are out there to kind of supplement wages and help protect those working poor.

But a lot of the folks that are earning the minimum wage, they’re either really young or it’s an entry level job. It’s teenagers earning the minimum wage. And there are actually studies that show that those earning the federal minimum wage or the minimum wage in their state typically get a raise within one to 12 months of being on the job.

When we talk about the wage floor, it’s not necessarily you’re going to be earning that for the rest of the time you’re in that job. So not only does the minimum wage floor present these opportunities for entry-level jobs, but it also presents an opportunity for upward wage growth in that job.

And so, I think we need to talk about sort of getting your foot in the door and minimum wage jobs certainly being an entry level opportunity for folks. But at the end of the day, I think we need to also message that these folks are not necessarily staying stuck at this level. And that’s sort of the beauty of an entry level job.

And for those who are working who are below the poverty line, there are other existing programs and other laws in place to help those folks. That should be part of the conversation.

Michael Schaus: And I think something you touched on there that’s really great is the economic mobility. That’s something that we should really focus on saying, “Hey, let’s make sure that we’ve got processes or help or education or whatever you need in place to assist people moving up the economic ladder.”

I become very aware of this because I tend to be a very libertarian guy and I realize that most of us who think libertarian or fiscally conservative or what have you, we are just kind of like the movement of no. We always say no.

We need to be able to present some sort of an alternative so that way people understand that it’s not that we want people to be earning “poverty wages.” It’s that we don’t think a one size fits all government solution is going to be good for the labor markets.

And to that end, something that we see increasingly nowadays is this discussion that’s coming up saying we should stop tipping and we should just pay people a better wage as opposed to tipping.

And I’ve seen this in my home state of Colorado there’s this wonderful little place called Cas Bonita and the creators of South Park recently bought it and it was fantastic. And they decided to do away with tipping there. And the employees actually are really upset about it because many of them are going to start earning less money.

And this is one of those instances where it’s one thing if a private company does it, but I think this is where the government control aspect of it becomes very worrisome not just for employers, but also for workers as well, especially in a hospitality state such as Nevada. I know that there are plenty of people working at those casinos, working at those restaurants, and working at those hotels or resorts that earn a ton of money because of tips. It would be really damaging to their economic situation if all of a sudden, we came up with a law that said we’re going to do away with tips and just increase your wage.

What does the economic research say about those types of schemes or those types of mandates?

Rebekah Paxton: Well first, I would say that Casa Bonita case has sort of taken off nationally as sort of a case study in this. But this is certainly the experience of employees all over the country in restaurants in California, on the East Coast, any of these states that have fully eliminated their tip credit and keep ratcheting up the minimum wage. Typically, employees are the ones that are fighting these laws.

So, the Casa Bonita is just another case study and another example of how out-of-state interests and activists are coming in and saying, “Hey, we’re going to raise your wages, and this is going to be good for you,” without actually listening to the workers it effects. And just like you said, a lot of these workers push back and say, “Actually, we earn a lot more through our tips and there are laws on the books to protect our tips and protect our wages so that we are on a slow night making enough money to make the minimum wage at least”.

But those tips are often putting them way over the minimum wage. And so, first and foremost, I think aside from economists, aside from groups like the Employment Policies Institute and others, it’s employees that are really pushing that fight forward to keep the tip credits intact and keep tipping in place.

But like you mentioned, certainly there are a lot of economic studies that show eliminating the tip credit, so raising the minimum wage for tipped restaurant employees and hospitality employees, would automatically sabotage restaurants’ bottom lines.

Restaurants and other hospitality businesses typically have a much smaller margin of profit than many other businesses. Soto raise labor costs by 200, 300, 600%, as we’re seeing in some cases, would absolutely put a business under.

And it would eliminate jobs. It would eliminate the opportunities to earn tips for so many employees. That’s well documented across economic studies. And then there are also studies that just look at earnings. Typically, once the tip credit is eliminated, folks are earning a flat hourly wage instead of the tips that put them over the minimum wage.

And so again, that’s why a lot of employees are opposed to these proposals. In fact, actually earlier this year, Toast, the point-of-sale platform, put out a study that showed tipping percentages in different states. States like California and Washington who had eliminated the tip credit fully, actually see the lowest tipping percentages by diners and consumers than states that have a more robust tip credit system.

And so there are studies backing that up out of Cornell and the Census Bureau that show that tip earnings decline when minimum wages go up and tip credits are slashed. So, it’s a lose-lose for employees and for businesses and for diners as well.

There have been surveys of folks that go out to eat that say, they don’t like when there’s a service charge slapped on their bill or menu prices go up. And they’re less likely to go out to eat. They’re less likely to frequent their favorite restaurants, and it’s not because they don’t love their local servers and love their local restaurants, but they can’t afford it either.

And that’s something that certainly we’re seeing where I’m from in Washington, DC. There was a ballot measure to eliminate the tip credit here. And we actually did a survey of over a hundred restaurants in the DC area that we’re anticipating this change that we’re going to start getting rid of the tip credit incrementally over the next couple of years.

And, you know, overwhelmingly a majority of restaurants were saying “We’re either going to have to close or move to Maryland or Virginia. We may have to lay off workers. We may have to institute service charges.”

And service charges actually seem to be the headline of the day. Across the country folks are getting more used to seeing those on their bills and they’re not happy and they’re wondering why. And a lot of it is because restaurants are just trying to make up for the increase in their wage bill.

You know, servers are not happy about service charges because service charges are not legally protected like tips are. Tips have to go directly to the employee that they’re given to. Service charges are actually in the hands of the restaurant. So, the restaurant may allocate some of those service charges to workers, but they also may be able to use it to make up for the rising wage bill and operation costs that they might be facing.

And so, restaurant owners don’t like service charges because they know their employees don’t like them. Employees certainly don’t like them because they don’t amount to the same amount of tips. And then customers also don’t like them because it’s an extra charge on their bill.

So certainly, the economic evidence and what economists have studied, but also what we’re seeing just kind of on the ground is that raising the tip minimum wage is sort of a lose-lose-lose for everybody.

Michael Schaus: I like talking about all this so that people understand the impact of it and kind of the real-life consequences of some of these what sound like good political talking points.

But also, we see the minimum wage is going up in Nevada again. By next year it’s going to be $12 an hour. I expect that we’re probably going to see more pushes for it. And just given the current political makeup of the state, I’m sure that it’s probably going to pass in one way, shape, or form in the next couple of years. Elsewhere we see various things already in place to move the minimum wage up. What can we expect to see as some of that happens?

There was an interesting story here in Nevada talking about the recent increase, which moved it up to 11 something an hour and both employees and businesses were not expecting a huge, huge difference. I mean, the businesses, of course, didn’t really like it, but even the employees understood, “Hey, look, I don’t expect a big benefit in in my paycheck right now.”

What can we expect as we see some of these mandated increases go into effect over the course of the next couple years?

Rebekah Paxton: I know the case in Nevada has been on the books for a little while, so employers have maybe seen some of those increases coming. Although like you said, they’re not as large as we’ve seen in some other states and some cities. For example, Denver, Colorado is looking at another $1 increase. I think they’re up to $18 in change per hour.

You know, California City is blowing well past $19 an hour. We’re seeing proposals for $20 an hour potentially in Massachusetts. I think California has a ballot measure to raise their minimum wage to $18. So certainly, there’s this wage creep.

If it’s not in Nevada, you know, it’s certainly in the states and cities around it. And while incremental increases like the ones we’re seeing in Nevada may not cause immediate shocks to the system, the trend is certainly not to stop at $12 an hour. And activists are certainly looking to push further than that.

I think we’re seeing that too on the federal level with Bernie Sanders proposal to raise the minimum wage across the board across the country to $17 an hour, where he also would eliminate the federal tipped credit. So that means not only would Nevada’s minimum wage go up to $17 but the tipped wage would go up to $17 as well.

You’re seeing legislators saying that’s not enough and that we need to tag those increases to inflation. That’s another trend we’re seeing across the country is that legislatures and voters are saying, “Okay, every year we’re going to increase the minimum wage according to inflation,” which if you have looked at the past couple of years, those increases have been pretty steep. That’s not necessarily something that businesses can adapt to quickly or something that they would know is coming in advance.

So that’s a dangerous trend that I think is causing businesses to be concerned and maybe preemptively lay off workers or hold off on hiring or eliminate some of their tipped positions because they don’t want to see that huge shock in their wage bill.

So, I think in Nevada particularly, you may see businesses start to brace for other shocks that come from out of state. And you know, I think it’s very reasonable to think that legislators or voters or out-of-state activists aren’t going to want to stop at $12 or Nevada. So, businesses may try to preempt those future changes by kind of battening down their hiring.

Michael Schaus: This is just kind of an assumption; I don’t know if there’s data to support this. But it just seems culturally that this becomes a bigger push as we enter more difficult economic times. I mean that makes sense because as we said at the very beginning, it just sounds nice for a politician to say, “Hey look, I’m going to raise your wages.”

Right now, we’re obviously in a moment of serious economic uncertainty and there’s not a ton of confidence in the economy for most people. I mean, even if inflation has slowed down a little bit, people are living real life. You realize my grocery bill’s getting out of control right now.

And with all that kind of pressure, I think that these types of pushes are going to become even more pronounced. More people are going to be talking about it and it’s going to be an easier sell for the Bernie Sanders types of folks. Do you see that kind of holding true, that as economic conditions improve, maybe this is going to become less of an issue because less people are going to feel uncertain economically?

Rebekah Paxton: I think one of the biggest drivers lately has been this talk about inflation. We may see inflation growth cooling a little bit, but it’s still going up and businesses are still recovering from Covid and lockdowns and all of that. And you know, God forbid we have another shock to the economy in that way.

Again, the political talking point of we want to protect workers, we want to reward them for their work, obviously everyone feels that way. But how to do it is really the question.

And I think there’s a lot of studies and I think the messaging could be better on the cautionary side, which is economists have found that raising the minimum wage contributes to inflation specifically for food prices. So, for restaurants or hospitality, businesses not only will be seeing a rising operating cost, but they also will be seeing this inflation in their wage bill. And that affects consumers as well, whether they’re going out to eat or they’re buying food at the grocery store.

Actually, there was a study out of Stanford University, I believe, that found that minimum wage increases create the highest inflation increases for the poorest of families. So, folks that are the poorest are seeing the effects of inflation most acutely essentially. That’s certainly an adverse effect that I don’t think politically would work so well if we talked about it as openly as we should.

Again, there’s other studies that focus on other things like rent. There was a study a couple of years ago now that showed that minimum wage hikes contribute to rent inflation because landlords see that wages are going up and so they’re competing with other housing landlords and other housing projects. And so, they’re able to kind of boost their increases as sort of a preemptive play.

So, there’s also this argument that as economic conditions worsen, like inflation and housing costs and things like that you know, raising minimum wages could exacerbate that. And I think that’s something that the cautionary side of the minimum wage debate doesn’t highlight enough.

And actually, there was a bill in California this past session, I believe, where they were going to try to tie the California minimum wage to housing inflation specifically. And what we found through analysis here at EPI was that the statutory minimum wage had already far exceeded the rate of inflation of housing costs.

So, we could say it’s a chicken or the egg situation, but I think in fact the economic evidence shows that the more we raise the minimum wage, the more economic turmoil we’re going to cause in terms of housing inflation, food inflation, and just general price increases.

Michael Schaus: Do you see any areas that we could point to as success stories areas, where some of these minimum wage increases have been fought successfully and that jurisdictions is seeing better economic growth? I’m thinking whether it’s a state or a city or something that that kind of shows not just what could go wrong, but instead, here’s how to do it right.

Rebekah Paxton: That’s a great question. And I’m sure, again, some of these more incremental increases minimum wage laws have been deliberated by state legislators over, several sessions or a longer period of time. You may see that those incremental increases are not as bad for the economy or businesses are able to see them coming and adapt to them.

Unfortunately, I think in terms of rhetoric and sort of the progressive turn of a lot of legislators and activists, you’re seeing calls for higher and higher mandates.

And so, for example, in New York activists were calling for a $20 minimum wage, $21 minimum wage in some parts of the state. More moderate legislators, including the governor, acquiesced and went for a $17 minimum wage, which is still one of the highest in the country at the state level.

So, while I’m sure there are places that have had more incremental increases I can point out, maybe the Dakotas or Missouri, which have kept their tip credit intact, I think that’s also a piece of the puzzle. If you’re going to increase the minimum wage according to cost of living, there are ways to do that incrementally that don’t shock the system quite as much. But keeping that tip credit intact seems to be a really important piece of the puzzle.

So that those restaurant operators who are operating on super thin margins aren’t necessarily having to increase their wages by 300 or 400%. And again, a lot of states have laws, but federally there’s also a law that protects tipped workers earnings. So, employers have to make up the difference between the tipped minimum wage and the regular minimum wage if tips don’t make up the difference already.

So, there are laws on the books to protect those workers and protecting the tip credit only allows those folks to make more than the minimum wage, as long as those tips are available.

Michael Schaus: Yeah, and that seems highly important, especially in a state, again, like Nevada, where there’s such a huge hospitality area. There are a ton of tipped workers throughout Las Vegas and Reno and what have you.

So definitely seems like a very important aspect of it that probably is not discussed as much as, or it doesn’t get as quite as many headlines as just the raw numbers for the minimum wage. If people want to find out a little bit more about what you guys are up to at the Employment Policies Institute, where can they go?

Rebekah Paxton: So, a lot of our research that we work with economists on is on our website at epionline.org. We also run a blog that responds to more current events and features a little bit more analysis, and that’s at minimumwage.com.

Michael Schaus: Well, Rebecca, we really appreciate you taking the time. Thank you so much.

Rebekah Paxton: Thanks so much, Michael. Good to talk to you.

Michael Schaus: Again, Rebecca Paxton, Research Director for the Employment Policies Institute, a great organization. They have all the answers you need if you’re looking for minimum wage information or information about the tipping minimum wage as well, which again, is kind of an under-reported thing here in Nevada.

I mean, you’ve got Bernie Sanders talking about $17 minimum wage nationally, and that certainly would create economic disruption. But again, think about how many people earn tips in the state of Nevada. And if the federal protection for tips goes away along with the higher minimum wage, that is going to wreak havoc on our economy because that’s going to make everything.

Not only is it going to make everything in the resorts more expensive, which of course is going to impact our tourism numbers, but also, folks who live here are not going to be making as much money.

And this is one of the frustrating parts of this entire discussion, is we are facing a lot of economic uncertainty. We are facing inflation. Housing costs are going up, food costs are going up, people are struggling economically and financially, and all of that. Economic uncertainty is going to get worse if we allow politicians to muddle in the wage laws that we currently have in place.

Hey, thank you so much for listening today. This has been Free to Offend. Hey, be sure to go to Nevadapolicy.org/podcast. You can sign up for our podcast and you can even reach out to us and let us know if there are specific topics or specific guests that you think we ought to entertain on the show.

Thank you so much for listening.