Minnesota’s new minimum wage, explained

This is one in a series of articles funded by a grant from the Northwest Area Foundation.

On Friday — for the first time in nearly a decade — Minnesota’s minimum wage will start a series of incremental increases, jumping from $6.15 per hour for large employers to $8 per hour. By 2016, that increase will top out at $9.50 per hour. And in 2018, the wage will start indexing to inflation.

The new law is the result of a hard-fought compromise between House and Senate Democrats who controlled the state Legislature last session, which is why the law offers a lot of caps, delays and carve outs to help small businesses absorb the increase. 

As the complicated new wage law starts kicking in on Friday, here’s what you need to know: How it works, who it will affect, and what the consequences might be:

What happens on August 1? A lot, and Friday is just the beginning. Until then, Minnesota law set the minimum wage at $5.25 for companies with annual revenues up to $625,000 and $6.15 for companies that have revenues of $625,000 or more. The new law will change the threshold for small and large businesses to those making more or less than $500,000 in annual revenues. For those above that line, the wage will go from $6.15 per hour to $8. The small employer wage will go from $5.25 per hour to $6.50.

But legislators also created a few special tiers to address concerns from small businesses. A 90-day training wage for employees under 20 years old will go up from $4.90 per hour to $6.50, and a new special “youth wage” for workers under 18 — who are not covered by federal wage laws — will also be set at $6.50 per hour.

The new law is expected to be completely phased by 2016, when it tops out at $9.50 per hour for large employers. Small employers, and those employing the training wage and youth workers, will have to pay $7.75 per hour.

What about federal minimum wage laws? Any business that engages in “interstate commerce” — which can mean simply swiping credit cards or using out-of-state suppliers – must pay the highest minimum wage offered, either the state or federal. The current federal minimum wage sits at $7.25 per hour. That covers most employers in the state, but a few workers are exempt from federal wage laws, including babysitters, nonprofit volunteers and many administrative professionals.

Who will be affected? Women and young people, mostly. Roughly 83,000 hourly workers in Minnesota make $7.25 an hour or less, according the most recent data from Minnesota Department of Labor and Industry. That accounts for roughly 5 percent of all hourly workers in the state. Women are more likely to be paid the minimum wage than men, and 60 percent of minimum wage workers are under the age of 24. Nearly 60 percent of minimum wage workers also have some level of college education. About 47 percent of hourly minimum-wage workers are employed in bars or restaurants, but more than half of those workers receive overtime, tips or commissions.

There’s also those who may benefit from the so-called “ripple effect” of a wage bump. Basically, economists have found that when the minimum wage goes up, workers who are paid above (but often near) the minimum also see their wages go up. 

What do businesses say about this? A lot, as you might imagine. The biggest concerns are coming from small businesses, especially in border communities, says Ben Gerber, a lobbyist with the Minnesota Chamber of Commerce. All of Minnesota’s surrounding states conform with the federal minimum wage of $7.25 per hour, Gerber noted, and some small towns near the border fear their business will move elsewhere facing a higher wage. The state is also changing the definition of a small employer in the bill to those making $500,000 in annual revenues or less instead of $625,000. “It’s hard to find an example of a business that has one or two employees that will make less than $500,000 in a year in annual revenue,” he said. “It’s going to be hard for even a small cafe in Minnesota to fall under that exemption.”

So what will the economic consequences be? It’s impossible to say with any certainty, though that hasn’t stopped a lot people from trying. Those who opposed the increase say that small businesses could end up hiring and employing less people — or just spread cuts around to make up for the increase in labor expenses. On the other side, supporters say the $9.50 increase would increase spending power in the state by $470 million, which doesn’t include any potential benefits from the so-called “ripple effect” described above.  

What’s this about a tip credit? There is no tip credit in Minnesota — which allows businesses to pay an employee less if they make up the difference in tips — despite the fact that all of Minnesota’s neighboring states conform to federal tip credit standards.

How does Minnesota compare to the rest of the nation? With the law going into effect, Minnesota will jump from one of only four states in the nation with a minimum wage below the federal level, to ninth highest minimum wage in the nation, along with five other states that also pay $8 per hour. That position will quickly change, however, as other states enact minimum wage increases passed this year.

When will the wage be indexed to inflation? Not until January of 2018, and that could depend on who’s governor. In a compromise struck during negotiations over the law, indexing was delayed until 2018 — and can be suspended altogether for up to 12 months by the commissioner of the Department of Labor and Industry if they feel the economy is headed for a “substantial” economic downturn. Nearly all of the Republican candidates running for governor say they have power to spike indexing if they win, but DFL legislators who crafted the bill say there are safeguards to keep governors from playing politics with the minimum wage. The governor must hold a public hearing to address their decision, for instance, and consult with “leading economic indicators” to prove there’s a downturn coming. This move is untested around the nation — none of the other 11 states in the nation that index their minimum wage to inflation give the executive branch authority over its fate.