New state minimum wage goes into effect

Gov. Steve Bullock announced at the end of last year that at the start of 2020 the state of Montana will be increasing its minimum wage from $8.50 per hour to $8.65.

"This increase ensures Montanans earning the minimum wage don't fall further behind, but we still have work to do to make a living wage a reality for all Montanans," Bullock said. "Montana has the sixth fastest wage growth in the nation over the past decade, and we must build on this trend by continuing to create good-paying jobs, supporting Montana businesses, standing up for employees who negotiate for better pay and increasing opportunities to pursue education or in-demand skills."

Montana is one of 29 states in the country which has a minimum wage higher than the federal minimum wage, which is set at $7.25 per hour.

University of Montana Bureau of Business and Economic Research Director Patrick Barkey said that the increase does not mean the minimum wage is a "livable wage." A livable wage is when the cost of living is translated into an hourly wage. He added that many different variables go into determining what is a livable wage, such as the size of someone's home or number of dependents.

Other areas and parts of the country, such as Seattle and states such as California, are looking into the idea of a livable wage and have dramatically increased their minimum wage to try to adjust for the cost of living.

Montana's legal requirement is to adjust for inflation, which has been restrained within the state in the past year, he said.

Last year, Montana's minimum wage was increased by 20 cents.

Barkey said that the minimum wage is mostly determined by politics and determined by what is acceptable and if it can be passed. The federal minimum wage is set in a similar way, although it does not have any annual adjustment for inflation, he added.

"It's completely political," Barkey said.

He added that a lot of research has been conducted looking into minimum wage, and it is something economists have been discussing since it was first established.

The federal government established a minimum wage in 1938, with the Fair Labor Standards Act, which set the federal minimum wage at 25 cents per hour and set other standards including banning oppressive child labor and setting the regular work week at 44 hours.

In the 2006 general election, the people of Montana voted to adopt Initiative-156, which would raise the minimum wage at the time and require that it be adjusted annually for inflation. The state then adopted Montana Code Annotated 39-3-409 which requires the Montana Department of Labor and Industry to adjust the Montana minimum wage for inflation using the Consumer Price Index for Urban Consumers.

According to a press release from the governor's office, an estimated 10,200 Montana workers, or 2.2 percent of the workforce, received hourly wages less than $8.65 per hour in 2019 and are likely to receive higher wages due to the 2020 minimum wage increase. It added that in 2018, the industry with the largest number of workers earning minimum wage was the accommodations and food services industry, such as restaurants and hotels, followed by the retail trade industry.

Department of Labor and Industry Public Relations Officer Lauren Lewis said that minimum wage is determined by taking the current minimum wage of $8.50 and increasing it by the Consumer Price Index for Urban Consumers.

She added that the Consumer Price Index increased 1.75 percent from August of 2018 to August 2019. The increase was then multiplied by the current hourly wage to determine the rate of inflation, which resulted in a $0.148 per hour increase. The number is then rounded to the nearest 5 cents, which resulted in the minimum wage being adjusted to $8.65.

"That is done to keep the minimum wage at the same purchasing power as the prior year," she said.

The effects of the change in minimum wage may not be dramatic but could have different effects depending on where people are in the state, Barkey said. In an area or a job where minimum wage is less than the average market wage, people will see little or no effect because the average market wage is higher than the minimum wage. The Montana increase in minimum wage has no binding power - it has no impact on wages higher than the new minimum. But in an area or job which has more people earning minimum wage, the increased pay could have adverse effects, causing employers to pass the cost of the adjustment on to the consumers by raising prices or by cutting employees.

Barkey said that 15 cents is not necessarily going to cause this, but research shows that if minimum wage has binding power it does have some negative effects.

Montana increased its minimum wage by 15 cents, and although it may not seem like very much, 15 cents per hour per 40 hours a week is $6 an employee per week. 

"It is an increase in cost," Barkey said, "but it's fairly modest, so it could be expected to have pretty modest outcomes."

But in other states or areas which are increasing the minimum by large amounts, the adjustment could create some unwanted side effects, he said, although those effects are also a complicated issue.

Barkey added that not every business has pricing power, the ability to pass the increase in wages on to the consumer by doing things such as raising prices. Most businesses, if they do raise the prices of goods or services, can possibly lose customers or sales to competing businesses.

Restaurants, for example, compete against people eating at home as well as other restaurants, he said. If minimum wage increases, restaurants may increase the cost of meals, passing the cost to customers. This could result in people going to restaurants less or ordering less-expensive meals. He added that a restaurant may also try alternative methods of cutting costs without passing it onto the consumers by decreasing the number of employees. The businesses which struggle the most are smaller local businesses, he said.

"It's purely a matter of logic, whether the minimum wage goes up by 15 cents or 15 dollars, it's the same mechanism it's just that the effect is a lot larger," Barkey said.

He added that Montana's increase is not very dramatic and will ultimately not have very adverse effects on businesses.

"Minimum wage has been around for a long, long time," Barkey said, adding that since it was first established it hasn't changed very much and has been heavily researched over the years.

He said that minimum wage was first established with a goal it still has, providing people with an adequate wage. He added that the areas which have dramatically increased their minimum wages and are moving toward establishing a livable wage are being carefully researched. 

Barkey said that a livable wage is a difficult subject, but regardless of opinion and political agendas, the research that has been done is clear, "if it is binding, it does affect hours and employment."