IB-11-17-2006 (November 2006)
Author: Linda Gorman
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What Amendment 42 would do:
Amendment 42 would make minimum wages a Constitutional requirement in Colorado. At present, Colorado’s minimum wages are established by Federal law. If Amendment 42 passes, Colorado’s minimum wage would increase to $6.85 on January 1, 2007. Each year thereafter, the minimum wage would automatically be adjusted for inflation. According to the Amendment language, the adjustment for inflation shall be “as measured by the Consumer Price Index used for Colorado.” According to the language, the Amendment 42 minimum wage must be “paid to employees who receive the state or federal minimum wage.” It also requires that “no more than $3.02 an hour in tip income may be used to offset the minimum wage for employees who regularly receive tips.”
Analysis
Understanding how employers set wages
Minimum wage supporters mistakenly claim that minimum wages help people by raising all wages. They assert that an increase in the minimum wage improves the welfare of all workers because employers respond to a minimum wage increase by increasing everyone’s wage. Employers are said to pay for this by raising the price of the products that they sell. If this assertion were true, then it should be possible to eliminate poverty forever by simply legislating a minimum wage of $100.
As an increase of $100 obviously would cause unemployment, supporters of minimum wage increases instead suggest that “moderate increases” have no effect. The problem with this argument is that it assumes that consumers will keep buying the same amount of a product even if the price increases. In fact, if an increased minimum wage increases business costs and businesses try to pass cost increases on to consumer by raising prices, consumers generally reduce their purchases. When gasoline prices increased rapidly in 2006, U.S. consumers purchased less gasoline. According to the U.S. Department of Transportation, Office of Highway Policy Information, the volume of gasoline sold in the United States in January-February 2006 was -0.3 percent less than the volume sold during the same months in 2005.
Unable to raise prices, businesses will often respond to increases in labor costs by cutting unprofitable lines of business or by substituting machinery for people. For example, an increase in the minimum wage could encourage a patio contractor to replace several minimum wage workers with a small backhoe when the time comes to dig patio foundations. An increase in the minimum wage might also cut the paid hours available to employees at a pizza parlor if its owner finds that his higher labor costs now outweigh the profits generated by the handful of customers who patronize the business late at night.
