This is one in a series of articles funded by a grant from the Northwest Area Foundation.
Labor unions and House Democrats were triumphant on Monday when DFL legislative leaders announced they had struck a deal on minimum wage. After a year of rallies, weekly phone banking, door knocks and lobbying, not only did advocates win their preferred wage increase to $9.50 per hour, they convinced hesitant Senate Democrats to index that wage to inflation each year.
But the final indexing deal hinged on a number of caveats, caps and delays that could cause trouble in the future, including a provision that allows governors to scrap indexing for up to a year at a time if they think the economy faces a “substantial” downturn.
Two Republican candidates for governor already say they will eliminate indexing if they’re elected this fall.
“You can’t take the politics out of the decision like this entirely,” said DFL Rep. Ryan Winkler, the author of the House minimum wage proposal. He pushed hard all session for a minimum wage bill that included indexing, rejecting several Senate proposals that came back without the provision.
“I hope this is focused on when it needs to happen for purely economic reasons.”
Indexing ‘off ramp’
Winkler said the idea behind this so-called “off ramp” for indexing isn’t so that governors can exercise their political preferences on labor policies.
Under the terms of the deal, any commissioner of the Department of Labor and Industry would have to review economic data — like GDP growth and the unemployment rate — and hold a public hearing before they can suspend indexing for a year. If the economy improves, indexing can be reinstated.
Winkler points out that there’s also an “accelerator” in the bill, which means governors can choose to not only reinstate indexing the wage, but also catch it up to where it would have been if indexing hadn’t been suspended in the first place.
While no commissioner can lower the wage under the proposal, it could mean dramatic spikes in the state’s minimum wage between administrations.
“I would like to have the decision … be one based on actual real data, not based on the politics around the House and the Senate here in the Capitol,” said Senate Majority Leader Tom Bakk, who noted that that measure and other changes to indexing were critical in winning 34 votes in his chamber.
Rural and suburban Senate Democrats have been concerned businesses can’t absorb both the wage hike and indexing in tough economic times.
“The indexing provision needed to be able to respond to future economic downturns, which will come,” Bakk said. “It makes a significant difference in our willingness to be able accept inflation.”
But Republican legislators Kurt Zellers and Dave Thompson, both candidates for governor, say they’d get rid of indexing if they win this fall.
Thompson said indexing is bad policy, but so is leaving that decision up to the executive branch.
“I thought they were going to put it on autopilot and they’ve done something maybe even worse, and that’s just put it at the whim of the executive branch,” Thompson said.
“I would do what’s in the best interest of the state economically, but I would also support legislation to take that power away from the executive. The Legislature should be responsible for those kinds of things. That’s why people elect representatives locally in the House and the Senate.”
Indexing caps, delays
The most recent compromise handed to the Senate Democrats on minimum wage started indexing the wage to inflation in 2017 and capped any increases at 3 percent. Senators rejected that offer. In the final deal announced Monday, indexing won’t start until January 2018 and increases will be capped at 2.5 percent in any given year.
“We are concerned about our minimum wage walking away from surrounding states that aren’t likely to ever have inflation,” said Dan McElroy, head of a restaurant advocacy group and the former commissioner of Employment and Economic Development under Republican Gov. Tim Pawlenty. His group was part of a chorus of business opposed to major changes to the state’s minimum wage laws.
“If you insist on doing that, having a limit and an off ramp are prudent public policy,” he said.
The cap means the wage couldn’t go higher than $9.74 in the first year that indexing is allowed. The wage will also be indexed using the implicit price deflator, a historically lower measure of indexing that the more common Consumer Price Index (CPI).
Both measurements look at the price of goods and services in a given year, but while the CPI is based on a fixed basket of goods and services, the implicit price deflator can change each year based on people’s consumption patterns.
University of Minnesota economics professor Aaron Sojourner says the 2.5 percent cap could be “binding.” In other states that use indexing, it’s more common to cap the increase at 3 percent.
“In the last decade the implicit price deflator has gone up more than 2.5 percent, so if this policy had been in place then it would have been binding,” Sojourner said.
However, Sojourner said using the implicit price deflator is probably a better way to go overall. CPI tends to focus on only urban consumers and doesn’t take into account real-time changes in spending.
“It seems like it really is a compromise,” Sojourner said, evaluating the indexing deal. “It’s not what either side wanted.”