In his State of the Union address earlier this year, President Obama called for Congress to raise the federal minimum wage to $9 an hour by 2015, with automatic adjustments upward to reflect increasing costs of living going forward. But with the current level of $7.25 an hour, the increase would amount to an almost 25% jump in the costs that minimum-wage employers have to pay, raising concerns about potential impacts on businesses and on employment among lower-paid workers. Although proponents argue that boosting the minimum wage stimulates overall economic growth by putting more money in the hands of workers, opponents respond that minimum-wage increases result in reduced hours for workers because of the cost pressures they put on employers.
One interesting fact in the minimum-wage debate is that many states already pay more than the federal minimum wage. Let's look at the six states that pay the highest minimum wage, according to figures as of the beginning of 2013 from the Department of Labor and more recent updates from various legislative sources.
Illinois pays workers a minimum of $8.25 an hour, but with several exceptions. Employers can pay workers under 18 as little as $7.75, while tipped employees are subject to an even lower potential minimum wage of $4.95, representing the allowed 40% credit that employers are allowed to claim on tip income. Proposals to lift the minimum wage to $10 an hour over the next four years have raised controversy, especially in light of disparities already between Illinois and surrounding states that opponents say put the state at a competitive disadvantage with its neighbors.
Connecticut's minimum wage is also $8.25 an hour, but it treats its tipped employees slightly better than Illinois, giving them a minimum of $5.69. Last week, though, the Connecticut Senate passed a measure to increase the wage to $8.70 next January and to $9 by 2015, which was a compromise from a more aggressive earlier bill that would have sent the minimum wage to $9.75 within two years. The bill goes to the state House for debate.
The $8.25 minimum wage that Nevada pays comes with an interesting twist: Companies that offer health insurance benefits to their employees are allowed to pay $1 less in hourly wages. Although a referendum in 2006 required the state to index its base wage to inflation, the wage has stayed the same since 2010. Another perk: Tipped employees have to receive the same minimum wage as other workers. That's a big cost for Las Vegas Sands (NYSE: LVS ) , Wynn Resorts (NASDAQ: WYNN ) , and other companies with casinos in the state that might otherwise be able to pay many of their tip-earning workers less.
In Vermont, minimum-wage workers receive $8.60 an hour, with amounts rising for inflation each year. Tipped employees, however, take a big haircut, with minimums as low as $4.10 applying to occupations where tips are paid. Vermont's unemployment rate recently fell to 4%, the lowest since before the 2008 recession, which wage-increase proponents argue is evidence against the idea that high minimum wages automatically mean higher unemployment.
In Oregon, the minimum wage is $8.95 an hour, with wages having increased along with the rate of inflation for a decade. Oregon's high minimum wage was specifically cited in testimony before Congress recently, as a National Restaurant Association representative noted that the average number of workers per restaurant in the state has decreased steadily since the minimum wage started rising at a faster rate than the federal minimum wage.
Finally, Washington currently tops the nation with a $9.19-per-hour minimum wage. The wage is indexed to the federal Consumer Price Index. Employers can pay workers who are 14 or 15 years old just 85% of the prevailing minimum wage. Even with the top figure in the country, however, a report from the Alliance for a Just Society found that a single adult would need to earn $16.13 an hour in the state to support basic household needs.
What the minimum wage means for investors
The minimum-wage debate often leads investors to focus on McDonald's (NYSE: MCD ) and its fast-food peers, Wal-Mart (NYSE: WMT ) and similar retailers, and other businesses where relatively low wages are an integral part of the viability of their business models. Yet many workers at those businesses earn more than the minimum wage, making increases largely moot. Moreover, the fact that McDonald's, Wal-Mart, and similar businesses maintain profitable operations in Washington, Oregon, and other higher minimum-wage-rate states suggests that companies can make adjustments to remain successful -- albeit perhaps at some cost to investor profits.
With the House of Representatives having rejected in March a Democratic push to raise the minimum wage to $10.10, the idea of a higher minimum wage is likely to be on hold for the foreseeable future. Meanwhile, these states will act as case studies to give evidence of the impact of higher wages on state economies.
Of course, some employers have expanded overseas, benefiting from lower labor costs. For instance, Las Vegas Sands has successfully capitalized on a booming Chinese economy, with its big bet on Macau gaming about a decade ago that's paid off in spades. The company is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in our premium report on Las Vegas Sands. Be sure to claim your copy today by clicking here.