Goldwater Institute study shows minimum wage hikes cause unintended costs and consequences

Proposition 206 was passed in November 2016, with 58 percent voting "yes."   File photo

A more in depth debate and economic analysis of the potential unintended and unseen consequences of raising the minimum wage must be held before any further push is made for change, one economist who studied the impact on one vital state service argues.

The Phoenix-headquartered Goldwater Institute partnered with Jim Rounds, an economist and founder of Tempe-based Rounds Consulting, to study the impact of minimum wage increases on the budget and operations of the Arizona Department of Economic Security’s Division of Developmental Disabilities (DDD).

This state program provides skills training and assistance to more than 35,000 Arizona children and adults.

Proposition 206 was passed in November 2016, with 58 percent voting "yes." It  raised the minimum wage to $10 in 2017, and then incrementally to $12 by 2020. It also created a right to up to 40 hours a year of paid sick leave. 

Rounds conducted a cost analysis study based on data from a sample set of 2,300 workers. That number was extrapolated into the larger population. The analysis concluded that Proposition 206 will cost the state — and thus the taxpayers — $45 million to maintain current staffing levels in state fiscal year 2018 for the DDD program alone, Rounds said.

While the new higher minimum wage rates do not apply to state workers, many of the services provided by the state are outsourced to contractors.

The debate ahead of the vote was partisan and, to some extent, superficial, with little discussion about the wider economic impact of the increases, Rounds told the Arizona Business Daily.

"I just wanted more of those intelligent conversations happening," Rounds said. "When we had these discussions before the vote, there was the view of the far left and the far right, but the real economic points were not being listened to."

Increasing the minimum wage is a deliberate public policy change that affects not just those on the wage floor but also up the chain. Rounds is concerned a push will be made to further increase the minimum wage to $15, and that once again solid economic analysis will be drowned out.

"Minimum wage hikes cause economic imbalances and unintended consequences," Rounds said.

Workers not properly included in the wage increase could become further disenfranchised with the program and move to private sector employment opportunities, the study argued.

Further, Rounds found, there are studies that show wage increase “pass through”, where those earning somewhat above the wage floor also receive an upward pay adjustment. It eventually tapers off, Rounds told the Arizona Business Daily.

The economist said he did not, as part of this study, look at the wider costs and potential benefits, including less state spending on welfare (food programs such as SNAP and WIC) or increased sales and income taxes.

Economic arguments were aired in the Arizona Supreme Court after the state Chamber of Commerce and other business groups presented a case claiming the minimum wage hikes were unconstitutional because they require new expenditures without a funding source. The justices found the wage increases are constitutional.

In one exchange, as reported by, Chief Justice Scott Bales said Proposition 206 could actually increase revenue and decrease spending in the long run.

“Do you think the constitution allows for the consideration of indirect benefits as well as indirect costs?” asked Bales, referring to an amicus brief. “If an increased minimum wage takes more people off of public assistance, the state’s going to increase its revenues.”

A lawyer for the Chamber of Commerce described that argument as hypothetical, and added, “We have to deal with realities."

Bales countered: “Aren’t the increased costs [to the state] also based on hypotheticals, because it makes assumptions about what the state will or will not choose to fund?"

The Goldwater Institute, in a post,  concluded that the "poorly conceived economic policy produces problematic unintended results, including the often-overlooked impact on taxpayers."

"As this case study proves, Arizona’s minimum wage hike will either result in a greater taxpayer burden or diminished quality of service," the institute's Executive Vice President Christina Sandefur said.

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