Costly Compromises: MD’s New Minimum Wage Law Creates ‘Training Wage’ Loophole, Leaves Tipped Workers Behind

Some of the very people who could use a raise the most – workers who rely on tips and young workers just getting a start in life – will be left shortchanged when Maryland’s minimum wage begins to rise next year.

While the General Assembly’s recent passage of legislation to raise the minimum wage to $10.10 an hour by 2018 is an important victory for working Marylanders, lawmakers made some unwise and unnecessary compromises that will significantly weaken its ability to help some workers and the state’s economy. We have previously discussed  why lawmakers should have kept a provision to allow the wage to automatically rise with inflation. Today we look at the new law’s other costly compromises, including a base-pay freeze for tipped workers and a ‘‘training wage” that will allow employers to pay workers under 20 years of age only 85 percent of the minimum wage for their first six months on the job.

Freezing the minimum base wage for tipped occupations at $3.63 an hour significantly reduces the economic benefit of the minimum wage increase for these workers. At least 63,000 workers in Maryland work for tips, according to the Bureau of Labor Statistics, in occupations  including massage therapy, bartending, waiting tables, gaming services, and hairdressing).

By excluding tipped workers, lawmakers are relegating them to the unpredictable nature of tipped work. And while employers are required to make up the difference if an employee’s tips and base hourly wage combined do not meet the minimum wage, this is difficult to enforce.

Total wages for tipped workers are 40 percent less than that of other hourly workers, and they are twice as likely to experience poverty. Restaurant servers, in particular, are three times as likely to experience poverty, according to the White House Council of Economic advisors. Furthermore,  the freeze  will disproportionately impact women, who make up 72 percent of the workforce in predominantly tipped occupations.

Currently, 18 states have a higher tipped minimum wage than Maryland. Some, such as Washington, Oregon, and Nevada, have significantly higher minimum wages for tipped workers, and a 2013 analysis found that higher hourly wages for tipped workers have not hurt job growth in these states.

Meanwhile, the training wage compromise is one of many exemptions in the minimum wage legislation that allows certain businesses to avoid having to pay the full minimum wage, including seasonal amusement parks, cafes and restaurants that have gross revenues of less than $400,000 a year, and Maryland’s only drive-in movie theater. It is an unnecessary loophole that encourages business models based on high employee turnover, making it less likely that younger workers will be able to find steady employment. The exemption is simply another handout to business. It will do little to improve the job prospects of Maryland’s younger workers,  since economic studies show that that the minimum wage has a negligible impact on teen employment. 

Further, the industries that stand to benefit the most from this loophole are the fast food and chain retail industries, which already have a high rate of staff turnover. The National Restaurant Association estimates that three quarters of fast food workers are new from year to year. The retail industry reports a median annual turnover of 67 percent, a figure that has risen significantly in recent years.

Studies show that increasing the minimum wage benefits businesses by reducing turnover and increasing productivity among their employees, which is why  prominent retailers such as the Gap and Trader Joe’s have decided to increase their minimum wage. Maryland’s training wage will likely have the opposite effect, since employers will have an incentive to replace their young employees rather than investing in them.

These kinds of exemptions undermine the minimum wage’s ability to help Maryland workers  make ends meet in the face of rising costs of living. Workers’ advocates should continue the fight to raise the minimum wage for tipped workers and to close loopholes such as the training wage so that all workers can share in the important victory achieved during the 2014 legislative session.

If State Lawmakers Favor Gradually Phasing in the Minimum Wage, They Should Love Indexing it to Inflation

The legislature’s decision to extend until 2018 the phase-in period for raising the minimum wage to $10.10 will needlessly delay a boost in earnings for Maryland’s workers and demonstrates why automatic increases based on inflation are the right way to ensure that the minimum wage keeps pace with the cost of living in the future.

As we have argued before, the minimum wage is too important to too many workers to leave at the mercy of the periodic whims of lawmakers. Even slight inflation steadily erodes the value of the minimum wage relative to the cost of food, housing, and other necessities, so workers continue to fall behind until lawmakers agree to increase the minimum wage, often at a lower level relative to the cost of living. 

Sources: Minimum wage data: Maryland Department of Labor, Licensing, and Regulation, "History of Minimum Wage in Maryland," February 22, 2010,https://www.dllr.state.md.us/labor/wages/minwagehistory.shtml; Inflation data: Bureau of Labor Statistics CPI inflation calculator, http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2014

A predictable, gradual, and - most importantly – continuous increase in the minimum wage would fix that. Tying  the minimum wage to inflation, known as indexing, would also benefit businesses, since they would know in advance when the minimum wage is going  up and by how much, improving their ability to plan.

Maryland would not be treading new ground by instituting indexing. Eleven states already tie their minimum wage to inflation.  President Obama has pointed out that indexing the federal minimum wage is something that he and Governor Romney  agreed on during the 2012 election, and opinion polls consistently show that doing so is popular. In addition, indexing is already used in a variety of other policies, including determining Social Security benefits and the amount of assets that are subject to the estate tax. If lawmakers are willing to tie exemptions from the estate tax for millionaires to increases in inflation, they should be willing to allow the same for workers’ wages.

Advocates of raising the minimum wage have secured an important – though needlessly drawn out – victory in Maryland and t is important to continue to build on this momentum. They should continue to push lawmakers to index the wage to inflation, rather than waiting for it to inevitably lose its purchasing power over time, requiring yet another campaign to raise it in the future. The best way to capitalize on the current victory is to push for a more lasting one.

The EITC Cannot Fight Poverty Alone

The Earned Income Tax Credit (EITC) is a powerful tool for helping low-income working families, but to effectively raise Marylanders out of poverty and foster broad-based prosperity, it must work alongside other measures, including a boost in the minimum wage.

Recently, some policymakers in Maryland have portrayed  the EITC as some kind of super-policy that can fight poverty on its own, but  this is not the case.

The EITC – a federal tax credit that Maryland supplements with a state EITC -- makes low-wage work more viable for families by offsetting some of the taxes they pay and boosting their income. However, as the non-partisan Center on Budget and Policy Priorities pointed out this week, there are some things that the EITC cannot do, like helping people who are out of work or unable to work, or helping the poorest families that do not make enough to qualify for the credit.

In addition, because families reap the benefits of the EITC once a year when they file their taxes, it does not help them when they may need a boost the most, like when the monthly rent is due or they need to repair the car they use to get to work. More broadly, because the EITC is based on wages, it does not automatically expand to stabilize the economy during recessions, the way that other services, like nutrition assistance, do.

The EITC also does not provide workers with health insurance.

Because of these limitations, we need other policies to complement the EITC, including nutrition assistance, access to health insurance through programs such as Medicaid, and unemployment insurance to see individual workers through job losses and help the economy as a whole through downturns. And, of course, a robust minimum wage that keeps up with the cost of living and allows workers to support themselves and their families.

Maryland policymakers need to recognize the importance of making these programs and policies work together on behalf of working families. For instance, as they consider legislation that would make the state’s EITC more generous, state lawmakers also should finish the task of raising the minimum wage. That would build on the strides Maryland has made recently in improving access to health care by expanding Medicaid and working to implement the Affordable Care Act.

It’s fortunate that so many policymakers agree the EITC is an important and effective way to provide economic assistance to working families in Maryland. The current proposal to expand the state EITC enjoys bipartisan support in the General Assembly, and the EITC has also won praise from conservative lawmakers such as U.S. Rep. Paul Ryan. Unfortunately, some of this acclaim portrays the EITC as an alternative to other policies such as raising the minimum wage, rather than as a supplement to those things.

The EITC is an important policy, but we should not rely on it to do everything. There is no silver bullet capable of singlehandedly ending poverty. Instead we need lots of programs and ideas to peck away at it from every angle.

Earned Income Tax Credit Legislation Would Improve an Already Effective Tool

Maryland’s General Assembly has a unique opportunity to help the working poor in a variety of ways this session—including by expanding the refundable portion of the state’s Earned Income Tax Credit.

On Wednesday, the Senate Budget and Taxation Committee heard testimony on a bill to expand Maryland’s Earned Income Tax Credit (EITC), which fights poverty while encouraging people to work more hours in low-wage jobs. If passed, the bill would increase Maryland’s refundable EITC to 28 percent from 25 percent of the federal EITC, giving an additional boost to 422,019 Maryland households and lifting more Marylanders out of poverty. A portion of Maryland’s EITC is refundable, meaning that if it exceeds the amount of taxes owed, the balance is returned to the taxpayer.

By providing a credit that increases as earnings increase up to a certain amount, the EITC encourages work. It is also an effective tool to decrease inequality and lift families out of poverty by leaving low-wage workers with more income to spend on food, clothing and other necessities.

To claim the federal EITC in tax year 2013, a taxpayer must have a modified federal adjusted gross (earned) income of less than $14,340 if the family has no dependent children, $37,870 with one dependent child, $43,038 with two dependent children, and $46,227 with three or more dependent children. The Center on Budget and Policy Priorities provides a useful tool to calculate the expected EITC for households of various sizes and income levels.

Maryland’s Refundable Earned Income Tax Credit amplifies the federal EITC. Maryland’s refundable EITC currently provides a credit for up to 25 percent of the federal EITC, which is $2,300 on average. Below, a chart from Maryland’s Department of Legislative Services illustrates the relationship between the state and federal EITC and earnings for a single parent with two children.

Source: Maryland Department of Legislative Services

The darkest colored area at the bottom represents Maryland’s refundable EITC. By increasing from 25 percent of the federal EITC to 28 percent, Maryland’s refundable credit will do more for working Marylanders. Given the average EITC amount and the number of households that benefit from the EITC, this expansion could result in an additional $19 million for working families in Maryland.

Further, because Maryland’s refundable EITC is tied to the federal credit, any expansion to the federal credit will only increase the power of Maryland’s  EITC. Earlier this week, we highlighted a promising proposal in President Obama’s budget that would expand the federal EITC to many more childless adults (very few of whom currently qualify). Taken together, these proposed expansions to the federal and state EITCs will provide needed assistance to Maryland’s workers.

The EITC gives low- and moderate-income workers the opportunity to catch up on bills and debts, and to begin accumulating savings. The increased income the EITC provides workers also benefits local economies as families quickly spend the funds on necessary household expenses. More broadly, studies have shown that the EITC helps move young adult men into the workforce and boosts their effective income, and may  improve marriage rates,  reduce crime, and reduce incarceration.

Finally, the EITC complements another important issue on the 2014 legislative agenda in Maryland – boosting the minimum wage. Workers earning the minimum wage would greatly benefit from  being able to keep more of their increased earnings due to an expanded EITC, and that would also help Maryland’s economy.

Putting the Issue to Rest – Why Automatic Minimum Wage Increases Make Sense

Raising Maryland’s minimum wage to $10.10 an hour is vital to the state’s economic prospects, but – as legislation proposed in Annapolis shows – that’s only half the battle.

In addition to raising the hourly wage rate, HB 295/SB 331 would require the state to annually increase the minimum wage based on the growth in the Consumer Price Index, a measure of inflation. This would address an important problem: the purchasing power of the wage decreases over time as prices increase, and periodic increases at unpredictable intervals adopted by the legislature tend to lag far behind the need. The legislation now being considered in Annapolis would not only raise the wage to catch up to  the price increases of recent years, but provide a way for the minimum wage to keep up with increasing costs in future years as well, without requiring additional legislative action.

Doing so makes sense. Given how important the minimum wage is,  it’s crucial that it  keep up with the cost of necessities. Today, 10 states have this automatic provision. In addition to being fairer to low-wage workers, this also makes the minimum wage consistent with programs intended to help low-income families maintain basic living standards.  For example, Social Security beneficiaries receive periodic Cost of Living Adjustments (COLAs) based on inflation. 

Sources: Minimum wage data: Maryland Department of Labor, Licensing, and Regulation, "History of Minimum Wage in Maryland," February 22, 2010, https://www.dllr.state.md.us/labor/wages/minwagehistory.shtml; Inflation data: Bureau of Labor Statistics CPI inflation calculator, http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2014

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Worse still, these periodic increases in the minimum wage do not necessarily respond adequately to increasing prices. As the chart above shows, sometimes lawmakers increase the minimum wage to a value less than what the wage would be had it automatically kept up with inflation. Tying the minimum wage to inflation  would make sure that not only is the minimum wage increased regularly and predictably, but also at an amount that matches the increase in prices.

This helps not only working men and women, but businesses too. First, indexing the minimum wage would give employers more certainty about labor costs. Second, it would help the low-wage customers of businesses better able to afford what the business makes or sells.

Tying automatic minimum wage increases to inflation would take the politics out of what ought to be an economic issue instead. Then, policymakers could focus more on other important issues crucial to Maryland residents’ economic well-being, like access to affordable health coverage, high housing costs, and student loan debt. While raising the minimum wage is a necessary start, additional policies are needed to address poverty and inequality.

Survey Results Highlight Economic Anxiety Among Workers, Importance of Assistance Programs

Many Americans are still feeling the effects of the Great Recession, and the recovery thus far has been skewed toward the wealthy. As the economic and employment prospects of moderate and low income Americans remains tenuous, safety net programs for those who face economic hardship are increasingly important, but remain under attack.

Yesterday, the Washington Post highlighted the difficulties that moderate and low-income Americans continue to face in an uncertain economy. In an article that centered on the findings of a University of Virginia survey and others, the Post vividly described the anxiety that workers face, and how their feelings about their prospects have worsened over time. To summarize:

Current Attitudes	Comparison from Previous Surveys
54 percent of workers making $35,000 or less worry “a lot” about losing their jobs	37 percent of workers making $35,000 or less worried “a lot about losing their jobs in 1992 and 1975
85 percent of lower income fear that their families’ income will not be enough to meet expenses	60 percent of lower income feared that their families’ income will not be enough to meet expenses in 1971
32 percent of low income workers worry all the time about meeting expenses	This is almost three times the number of people who felt this way in the 1970s
More than 6 in 10 workers worry they will lose their jobs because of the economy	According to the Post, today’s worries exceed those in 1975, a time of recession marked by high unemployment and high inflation.

These finds bring into stark relief the way in which low and moderate income workers have been left out of the economic recovery since the great recession. At a time when the stock market is reaching record highs, the University of Virginia survey shows that many feel like their economic prospects have only worsened in recent years.

Economic anxiety is particularly acute among low income workers. Intense worry about possible job loss is 29 percent, among workers with incomes between $35,000 and $75,000, and drops to 17 percent for those with incomes above that level. This is the result of increasing inequality, stagnating wages, and declining wages among those with low incomes. Since 2000, average household incomes for the poorest 40 percent of workers have fallen by more than 10 percent, according to the Post. As we showed in our State of Working Maryland 2012 report, while incomes for most have stagnated, incomes for the wealthiest residents have increased dramatically:

Change in Real Annual Household Income by Income Group, 1979-2007

(Click to Enlarge)

Data source: Congressional Budget Office, 2010

In this context, government safety net programs play an important role in assisting those whose worst economic fears are realized. However, these programs face erosion and attack, as unemployment benefits for 2.1 million workers are set to expire at the end of the year absent Congressional action, and nutrition assistance benefits have already decreased after being expanded by the post-recession economic stimulus and face calls for further reductions from lawmakers. In their ‘Hardship in America’ series, the Center on Budget and Policy Priorities highlights the tough times that many workers face and the programs that help alleviate poverty, such as the Earned Income Tax Credit, housing and food assistance, and unemployment benefits.

Fortunately, Maryland maintains important programs to help moderate and low-income workers such as its own Earned Income Tax Credit and expansion of Medicaid which starts in 2014. As state lawmakers face tough decisions on the state’s budget in the upcoming legislative session, it is important that they prioritize the economic security of Maryland’s workers and maintain and expand programs that help workers amid an economic recovery that has largely excluded them. 

Montgomery County Council Raises Minimum Wage to $11.50 by 2017

Yesterday, the Montgomery County Council voted overwhelmingly to increase the county’s minimum wage. The current minimum wage in the county is the same as the state and federal minimum wage, $7.25 per hour. Under the plan passed by the council, the county minimum wage will rise in annual increments: to $8.40 in October 2014, $9.55 in 2015, $10.75 in 2016 and $11.50 in 2017.

The Washington Post characterizes these efforts as “part of a national movement by state and local governments to address growing wage inequality where Congress has not.” Indeed, the move by Montgomery legislators is part of a coordinated regional effort alongside the District of Columbia and Prince George’s County. Lawmakers in Prince George’s are now expected to pass a similar measure today on the minimum wage after having delayed action until Montgomery held its vote on the wage. The District is expected to follow suit shortly on some version of a minimum wage increase.

It is important that state lawmakers follow the lead of Montgomery County and raise the minimum wage in the upcoming legislative session. For the past forty years workers have lost buying power, even as. Raising the minimum wage would increase the earning of households with low-wage workers. Because those with low and moderate incomes are more likely to spend the additional income they receive, putting more money in the hands of these workers would also boost the local economy. Further, polling finds that most Americans support raising the minimum wage, as do a majority of Maryland residents.

One final note: Montgomery County decided not to index their minimum wage increase to inflation, and they excluded tipped workers from consideration (although employers are still required to pay tipped workers the state minimum wage if their tips aren’t sufficient). The General Assembly should include an inflation index and protect tipped workers when it takes up the state minimum wage bill in January. Furthermore, the enforcement mechanism for Montgomery County’s minimum wage is also unclear and may require state action. Stay tuned for more updates on this important issue.