By the number of research papers published, the minimum wage is the most hotly debated topic in American labor economics. In 2015, over 20 states will increase their minimum wage to a level above the federal minimum wage. New Hampshire is one of 21 states to not have a minimum wage above the federal level. It also has the lowest minimum wage in New England and is one of the few states in history to pass legislation to remove its statewide minimum wage in 2011.

Reported by the Bureau of Labor Statistics, New Hampshire has 11,000 minimum wage workers, representing 3.0 percent of the state’s hourly paid workforce. Opponents of minimum wage proposals often point to the fact that New Hampshire has the lowest percent of minimum wage workers in New England and one of the lowest in the nation. Tennessee, Idaho and Alabama have over 6.8 percent of their state’s workforce making at or below minimum wage.

Minimum wages across the country.
Minimum wages across the country.

According to New Hampshire business and trade organizations, minimum wage workers are limited to trainees and disabled workers. However, thousands of workers get paid just above the minimum wage. Using data from the Current Population Survey, a minimum wage increase to $9.00 per hour would directly increase the salary of 47,500 New Hampshire workers, and an increase to $10.10 would increase the salary of almost 80,000 workers.

New Hampshire’s median wage is just above $17, and even though a small proportion of New Hampshire’s workforce is paid the minimum wage, almost twenty percent earn below $10 an hour. Take McDonald’s for example; McDonald’s workers in the Granite State have an average crew salary just above $8.50, which is not even a dollar higher than the averages seen in southern states like Alabama and Mississippi based off online salary reporting (from indeed.com glassdoor.com). A minimum wage increase above $9 would have a large binding impact on the New Hampshire workforce.

On March 3rd, 2015, I sat before the New Hampshire Senate Finance Committee, testifying with the Dartmouth Policy Research Shop on an economic analysis report for minimum wage increases. Our objective report focused on the likely impacts on New Hampshire’s economy, businesses and citizens. Following our fifteen-minute testimony on SB 261, the floor was opened up to questions.

New Hampshire State House.
New Hampshire State House.

Senator Reagan (R-Deerfield) was the first to speak, and he immediately questioned, “if we dictate to a business that they are now going to have an increase expense in their wage line, where will that money come from?”

It was the classic colloquial minimum wage question. In reality, labor markets rarely behave like traditional competitive markets but have monopolistic characteristics and efficiency wage features. Our research focused on examining New Hampshire employment effects from minimum wage increases. Using data from the Quarterly Census of Employment and Wages, we examined the effect of minimum wage increases from New Hampshire’s contiguous county pairs – adjacent counties that straddle the state border — between 1990 and 2006. Controlling for population growth, we found no evidence that an increase in a state’s minimum wage led to a decrease in levels of employment.

Where did businesses get the money? Meta-analysis research (i.e.: studies that aggregate data from previous peer-reviewed research) has observed a net income increase following minimum wage increases. This increase in income for low wage workers leads to a fiscal multiplier effect, which boosts spending and consumption. Over the past forty years, literature has examined how higher wages increase worker retention and productivity, as workers earn enough to afford childcare and improved healthcare. And this increase in employee retention decreases the costs a business has to pay for labor turnover and training. Even though our research saw no negative employment effects in New Hampshire from previous minimum wage increases, some research has observed businesses raising prices or decreasing worker hours and fringe benefits.

Senator Reagan did not seem pleased. Before I could finish he was granted a follow up question.  “So can somebody answer my question, where are all these increased dollars going to come from to pay these employees, where is a business going to get the money to pay the increased wages?”

Disgruntled, I realized a macroeconomic answer was not going to work. The question was too rhetorical. Where do businesses get money to pay for taxes? Where do businesses get money to pay for an increase in property rental rates? I started to explain mathematically the very low elasticities observed with individual state minimum wage increases. Where by aggregating past research, a 10 percent increase in a state’s minimum wage frequently led to less than a 1 percent increase in prices and teen unemployment, or a 1 percent decrease in jobs or average hours worked.

Before I could continue, the senator interrupted me, “just get back to the question.” Thankfully the chairwoman of the committee stepped in to end the line of questioning, but I was puzzled by the Senator’s inability to recognize the flexibility of businesses’ cash flow. Economics is not a zero-sum game. There is no finite level of employment, income or production.

The University of New Hampshire estimates that the living wage in New Hampshire is around $9.68, the full time wage necessary for a single adult to meet basic needs of housing, food and transportation. New Hampshire’s minimum wage earners of $7.25 are largely non-teen (72 percent) and around 15 percent are parents. According to the New Hampshire Fiscal Policy Institute, increasing the minimum wage to a level adequate the living wage would help thousands of families reach a “living wage.” And this boost in net income, according to the Economic Policy Institute, would decrease the poverty rate as well as state public welfare spending, which could reduce net government spending.

Even with the citizens’ interest in mind, state representatives must regard the academic literature before coming to conclusions on economic issues. Increasing the minimum wage is not a destructive macroeconomic toll on the state economy. It is time for the New Hampshire State Senate to not just have a minimal comprehension of the minimum wage.

 

 

John Lynch

The Supreme Court’s landmark decision on June 28th of this year solidified the constitutionality of possibly the most controversial pieces of legislation ever passed by the Obama administration. The Patient Protection and Affordable Care Act (PPACA), signed into law on March 23rd, 2010 (NCSL), can be described as a fundamental restructuring of the health insurance system in the United States, one that implements significant changes at the individual, state, and federal levels. But while the questions regarding the constitutionality of PPACA have been definitively resolved, disagreement has arisen over how the law should be implements, especially among groups that previously asserted that the law was wholly unconstitutional.

While the passage of the law means that the 17.1% of Americans that are uninsured must seek coverage or pay a penalty or a tax (Mendes), an even greater responsibility is assigned to the states themselves. By January 1, 2014, all 50 states are required to establish what PPACA describes as a “health insurance exchange,” a virtual marketplace where individuals can shop for different private coverage plans (approved by the federal government) from different companies (NCSL).  The federal government will create federally controlled exchanges in states that fail to meet this deadline. While these exchanges would make it easier for consumers to compare benefits and costs, establishing such a marketplace puts an additional financial burden on state governments already plagued by the financial woes of the continuing economic slump.

New Hampshire today faces the challenge of PPACA to create a health insurance exchange in under 2 years. But is it in the best interest of the state to go forward with the construction of its own exchange? This difficult question must take into account the unique demographics of New Hampshire, as well as a comprehensive cost-benefit analysis between the possible courses of action.

The Options

New Hampshire, as well as the other 49 states, can choose one of two possible courses of action in response to PPACA’s mandate to create a health insurance exchange:

–        Create and fund a state controlled exchange by the mandated deadline;

–        Do nothing until the deadline and allow the national government to step in and create a federally controlled exchange.

Here, it is important to realize that no matter the course of action taken, some form of a health insurance exchange will be established in New Hampshire under PPACA. The choice that must be made is whether that exchange will be controlled by the state or federal government.

Given that every state has a unique political, economic, and social climate, the best course of action will vary between states. Recent controversy in the New York Senate over health care exchanges demonstrates the link between political and ideological support for the bill: NY Senate Democrats ardently support the establishment of a statewide health insurance exchange, touting the possibilities of universal access and lower costs. Senate Republicans have taking the opposing view, pointing out the unnecessary and inefficient government intrusions in a large section of the private sector (Campbell). Elsewhere, the populous and liberal leaning state of California had already begun establishing a health care exchange even before the June Supreme Court ruling (Wood). In contrast, the sparsely populated and more conservative state of Alaska has opted to simply wait until the deadline and allow the federal government to establish its own exchange in this state (Rosen).

Thus, we must consider all major demographic factors in order to make a sound judgment as to which course of action New Hampshire should pursue.

Evaluating the New Hampshire Health Insurance Exchange

The benefits touted by the Obama administration in favor of health insurance exchanges are primarily economic. Such an exchange fosters competition and grants greater accessibility to health care for individuals, and presumably covers costs incurred by patients without insurance. In addition, plans sold on the health insurance exchanges are purchasable by all people, even those with pre-existing conditions. Ultimately, the promised result of establishing health insurance exchanges is that the price of coverage and indeed overall health care goes down.

In a time of economic uncertainty, such a financial incentive would be a boon to not only individuals, but businesses that provide health care to their employees. The less money that people have to spend on health care, the more their disposable income will grow, effectively creating a stimulant for the national economy. In addition, these exchanges would bring us closer to universal coverage of Americans, which would allow for a healthier society.

While the establishment of health care exchanges has these amazing benefits attached, one major question mark of creating an exchange of course is that these benefits are not guaranteed. It is extremely difficult to estimate the projected savings from establishing an exchange, given that few states have actually completed the creation of an exchange. Also, the magnitude of these savings depends on the statewide demand for health insurance, the number of insurance companies in the state, and what the national government deems as qualifying insurance plans. Equally difficult is assessing the cost of establishing these exchanges within the time frame allotted by the federal government and the cost of keeping these exchanges operational for the same reasons stated above.

Fortunately, we can look to the state of Massachusetts for an example of a relatively successful health insurance exchange and draw inferences about the possible benefits of establishing a state run exchange in New Hampshire. Created in 2006, the Massachusetts health insurance exchange succeeded in bringing the number of uninsured people down to a mere 2% of the 6.6 million residents, from 10% before the law was implemented (Romney). However, the cost of maintaining this exchange has rise to $32 billion in 2011 (Kliff), resulting in over $9,000 in health care spending per capita (compared to $6,800 nationwide) (Kaiser Health). New Hampshire has a population of only 1.3 million, with 10% uninsured as well, and 10% living in poverty (compared to poverty rates of 15% in Massachusetts and 21% nationwide).

Because a substantial portion of health insurance exchanges involve fixed administrative costs (State of Delaware), New Hampshire’s lower population may not translate to a proportionally lower cost than Massachusetts’s exchange expenses. In addition, Massachusetts’s program was aimed primarily at those with lower income, but New Hampshire’s lower poverty rate diminishes the impact of this provision.

Finally, with a budget deficit of close to $3 billion (Sunshine Review), New Hampshire can hardly afford to make wayward investments in an expensive program whose benefits are far from guaranteed.  It would appear that the cost of a New Hampshire health insurance exchange definitively outweighs the benefits, and that this option may not be the best course of action.

Letting the deadline pass

As of now, this is the option that the New Hampshire government has chosen to take. On June 18 of this year, Governor John Lynch signed HB 1297 into law (Kaiser Health), prohibiting a state sponsored a health insurance exchange, instead opting to allow the federal government to step in and create its own exchange. Politically this was the favorable choice: opposition from members of the executive council and the citizenry (a plurality of which oppose PPACA) made creation of a state run health insurance exchange politically unwise, if not altogether impossible.

Establishment of a federally controlled health insurance exchange carries much of the same benefits as a state controlled one. Individuals will still be able to shop and compare different plans from different insurance companies at competitive prices. Nobody will be excluded because of pre-existing conditions, and everyone will have access to health care.  The major benefit of course is that New Hampshire does not need to spend its own resources to create this exchange. Passing the PPACA deadline means that the national government assumes total responsibility.

No doubt Uncle Sam does not provide free lunch.  It is difficult to estimate the potential savings from deferring responsibility from the government.  Also, federal control comes with its own set of drawbacks and limitations. For example, the plans sold on the exchange would be determined by the federal government, which has few if any incentives to cater specifically to the health care needs of New Hampshire residents. This situation could result in a New Hampshire health care exchange that attracts few consumers, ultimately defeating the original purpose of these exchanges.

But taking into account the small size of New Hampshire and the fact that most residents are already covered, it is perhaps logical to let the federal government handle the establishment of an exchange and have the state government focus on other legislative issues.  The federal government intrusion will likely not sit well with the right-leaning populace, 49% of which opposed the original PPACA legislation in its entirety, while only 38% fully supported it (Smith). Nevertheless, given that New Hampshire’s health care market is smaller relatively to other states, intrusion from the federal government is less likely to have a dramatic impact than in a larger state such a California, which has over 10 times the number of health care providers and obviously a much larger population in need of health care (Kaiser Health).

Conclusion

Given the political, economic, and demographic situation of New Hampshire, Governor Lynch has made the expedient decision in deferring the responsibility of creating a health care exchange to the federal government. Although he initially supported creating a state run exchange, the political atmosphere in Manchester led him to the inevitable about face.  Although the precise dollar amounts are impossible to predict, economically, the costs for the state appear to outweigh the benefits.  Indeed, New Hampshire stands favorably to the national average both in terms of the percentage in poverty and uninsured. There is no pressing incentive for the state to establish a health insurance exchange compliant with PPACA deadline.   Only time will tell how the inevitable bureaucracy from Washington DC will affect the granite state in a federally run system.