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Research report:  Understanding the minimum wage in Minnesota

By David Berry, DLI Research and Statistics, June 7, 2019

Contents

Introduction and summary

With the recent introduction of municipal minimum wages in Minneapolis and St. Paul (all slated to reach $15.00 an hour at various points in the 2020s), the topic of the minimum wage in Minnesota has become more complex. To understand the minimum wage in Minnesota, it is essential to consider the federal and state minimum wage levels along with the levels in Minneapolis and St. Paul, and to consider how these levels have changed, and will be changing, relative to prices and other wages over time. This report presents data that speaks to these questions.

Throughout, it should be kept in mind that at any place and time, the effective minimum wage – the level employers are required to pay to covered employees – is the highest of the federal, the state and any local levels.

The following is a summary of findings.

  • Actual minimum wages for Minnesota, Minneapolis and St. Paul – The Minnesota minimum wage – $9.86 an hour for large employers in 2019 – is adjusted annually for inflation. The minimum wages for employers of different sizes in Minneapolis and St. Paul will reach $15.00 in various years from 2022 to 2027 and will be adjusted for inflation thereafter. After an initial transition period, employers of all sizes in the two cities will have the same minimum wage (Figure 1).

  • Inflation-adjusted minimum wages – Adjusting for inflation, the 2019 Minnesota large-employer minimum wage of $9.86 an hour is somewhat below the average level of the federal minimum wage for 1960 through 1980, $10.32. When the Minneapolis and St. Paul minimum wages have reached $15.00, they will be higher, adjusting for inflation, than the roughly $12.00 peak reached by the federal minimum in 1968 (Figure 2).

  • Inflation-adjusted annual earnings at the minimum wage – At the 2019 Minnesota large-employer minimum of $9.86, a full-time worker would earn about $20,500 annually. After the transition periods in Minneapolis and St. Paul, full-time earnings at the minimum wages in the two cities will be about $29,000 in 2019 dollars (Figure 3).

  • The minimum wage relative to the poverty line – At the Minnesota large-employer minimum wage, full-time annual earnings are about equal to the poverty threshold for a household of three. At the Minneapolis and St. Paul minimum wages for 2028, full-time annual earnings will fall about midway between the poverty thresholds for households of four and five (Figure 4).

  • The minimum wage relative to hourly earnings in manufacturing – Relative to average hourly earnings (AHE) of production workers in Minnesota manufacturing, the federal minimum wage peaked at 55% in 1968. After the transition periods in Minneapolis and St. Paul, the $15.00 minimum wages in the two cities will stand at roughly 66% of manufacturing AHE (Figure 5).

  • The minimum wage relative to hourly wages of nonfarm workers – The 2019 Minnesota large-employer minimum of $9.86, as adjusted for inflation in future years, is running at somewhat less than the 10th percentile of hourly wages of nonfarm wage-and-salary workers in Minnesota. After the transition periods in Minneapolis and St. Paul, the minimum wages in those cities will be at about the 25th percentile of overall nonfarm wages in the state (Figure 6).

  • The percentage of jobs at or below the minimum wage – For 2019, the number of Minnesota jobs paying at or below the minimum wage is estimated at between 244,000 and 260,000, or between 8.3% and 8.8% of all jobs. For Minneapolis in 2024, when all of its employers (as of July 1 of that year) will be paying a projected $15.35 minimum wage, an estimated 17.7% of jobs will pay this rate or less. For St. Paul in 2028, when all of its employers (as of July 1 of that year) will be paying a projected $16.33 minimum wage, an estimated 21.2% of jobs will pay this rate or less (Figure 7).

Actual minimum wages for Minnesota, Minneapolis and St. Paul

Figure 1 shows the minimum wage levels for Minnesota, Minneapolis and St. Paul for 2018 to 2028 for employers of different sizes. The federal minimum wage, $7.25 since 2009, is not shown because it is less than the minimums for the three jurisdictions shown.

Figure 1. Minimum wages in Minnesota, Minneapolis and St. Paul, 2018-2028

As of Jan. 1, 2019, the Minnesota minimum wage was $9.86 for large employers (see figure for definition) and $8.04 for small employers. These levels are adjusted every Jan. 1 for inflation. As of Jan. 1, 2019, these levels applied everywhere in the state outside of Minneapolis because the St. Paul minimum wage first takes effect in 2020.

The Minneapolis minimum wage for large employers rises from $10.00 as of Jan. 1, 2018, to $15.00 as of July 1, 2022, and is adjusted for inflation every Jan. 1 thereafter. The Minneapolis minimum for small employers has a more delayed phase-in than for large employers, but will attain the same level as for large employers as of July 1, 2024.

The St. Paul minimum wage takes effect in 2020. For large (non-macro) employers, it reaches $15.00 on July 1, 2023; small and micro employers reach the $15.00 level in 2025 and 2027, respectively. All employers will have reached the same level as macro employers (an indexed $15.00 minimum) by 2028.

Because (1) the large-employer minimum in Minneapolis and the macro-employer minimum in St. Paul both reach $15.00 on July 1, 2022, (2) the provisions for inflation-indexing are the same in the two cities and (3) the minimums for all employers in the two cities will eventually reach the large-employer level in Minneapolis and the macro-employer level in St. Paul, employers of all sizes in the two cities will be paying the same indexed minimum wage as of July 1, 2028.

Note that the definition of "small employer" is different for Minnesota than for either Minneapolis or St. Paul. For Minnesota, small employers are those with less than $500,000 in annual revenue. For Minneapolis and St. Paul, small employers are those with 100 or fewer employees (and more than five employees for St. Paul). According to data from the U.S. Small Business Administration, businesses in 2012 with one to four employees had an average of $406,000 in annual revenues.1 Extrapolating from this, a business with five employees would have an average of more than $406,000 in annual revenues. Thus, the $500,000 dividing line between "small" and "large" for Minnesota is at the lower end of "small" for Minneapolis or St. Paul (and near the line between "small" and "micro" for St. Paul). In other words, many employers that would be "large" for Minnesota would be "small" for Minneapolis or St. Paul.

Inflation-adjusted minimum wages

Figure 2 shows the minimum wages for the United States, Minnesota, Minneapolis and St. Paul for 1960 to 2028, adjusted for inflation (in 2019 dollars). In 2019 dollars, the federal minimum wage reached a peak of roughly $12.00 an hour in 1968. The current federal minimum of $7.25 (its level since 2009) is not indexed for inflation. Therefore, in 2019 dollars, the value of the federal minimum is projected to decline to $6.15 by 2028 in the absence of any statutory increases.

Figure 2. Minimum wage, inflation-adjusted (2019 dollars), United States, Minnesota, Minneapolis and St. Paul, 1960-2028

Missing media.

In 2019 dollars, the current large-employer Minnesota minimum of $9.86 was higher than the U.S. and Minnesota levels of any year from 1980 through 2015, and somewhat below the average level of the federal minimum wage for 1960 through 1980, $10.32. Although the state minimum wage is currently indexed for inflation, the constant-dollar value of the state minimum is projected to decrease slightly through 2028. This is because the index used under statute to increase the state minimum – the implicit price deflator for personal consumption expenditures – is projected to increase less rapidly than the index used in Figure 2 to express the trends in constant-dollar terms – the consumer price index for urban consumers (see notes 3 and 6 in Figure 2).

The minimum wages shown in Figure 2 for Minneapolis and St. Paul are the small-employer minimums. This is because, in contrast to the provision for the state minimum, the small-employer categories for the Minneapolis and St. Paul minimums include employers with up to 100 employees (see Figure 1 and related discussion). In 2019 dollars, the Minneapolis and St. Paul small-employer minimums are projected at somewhat less than $14.00 an hour for 2028. These values are less than $15.00 because they are adjusted for projected inflation between 2019 and 2028. Nonetheless, these inflation-adjusted values are higher by roughly $2.00 an hour than the inflation-adjusted value of roughly $12.00 reached by the federal minimum in 1968. As noted above, after the initial transition period, employers of all sizes in the two cities will have the same minimum wage (Figure 1).

As with the state minimum wage, the constant-dollar values of the Minneapolis and St. Paul minimum wages are projected to decrease slightly over time once inflation-indexing has begun (after 2024 and 2026, respectively, for the small-employer minimums in the two cities). The reason is the same as with the state minimum wage (see above).

Inflation-adjusted annual earnings at the minimum wage

Figure 3 shows full-time annual earnings at the minimum wages for the United States, Minnesota, Minneapolis and St. Paul for 1960 to 2028, adjusted for inflation (in 2019 dollars). This figure is identical to Figure 2 except for the scaling of the left axis (see note 1 in Figure 3).

Figure 3. Full-time annual earnings at the minimum wage, inflation-adjusted (2019 dollars), United States, Minnesota, Minneapolis and St. Paul, 1960-2028

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Where the federal and state minimum wages are concerned, inflation-adjusted full-time annual earnings reached a peak of roughly $24,900 in 1968 at the federal minimum. At the state minimum (for large employers), full-time inflation-adjusted annual earnings are currently somewhat more than $20,500. At the small-employer minimums in Minneapolis and St. Paul, full-time annual earnings, in 2019 dollars, are projected to reach about $29,000 in 2024 and 2026, respectively.2 

The minimum wage relative to the poverty line

Figure 4 compares minimum-wage earnings to the poverty line. It shows full-time annual earnings at the minimum wages for Minnesota (as of 2019) and Minneapolis and St. Paul (as of 2028, expressed in 2019 dollars) relative to the official United States poverty thresholds (projected to 2019) for households of different sizes (see note 1 in the figure). In 2019 dollars, the poverty threshold ranged from $13,000 for a one-person household to $31,000 for a household of five.

Figure 4. Full-time annual earnings at the minimum wage, Minnesota for 2019 and Minneapolis/St. Paul for 2028 in 2019 dollars, compared with poverty level threshold for 2019

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At the Minnesota large-employer minimum wage for 2019, full-time annual earnings – $20,500 in 2019 dollars – were roughly equal to the poverty line for a household of three. At the 2028 minimum wage for Minneapolis and St. Paul (see note 4 in Figure 4), full-time annual earnings are projected to be about midway between the poverty thresholds for four- and five-person households.3 

The minimum wage relative to hourly earnings in manufacturing

It is also relevant to gauge the level of the minimum wage relative to other wages. Figure 5 expresses the minimum wages of the United States, Minnesota, Minneapolis and St. Paul as percentages of average hourly earnings (AHE) of production workers in Minnesota manufacturing for 1960 to 2028.4

Missing media.

Figure 5. Minimum wages of United States, Minnesota, Minneapolis and St. Paul as percentages of average hourly earnings of production workers in Minnesota manufacturing, 1960-2028

As a percentage of manufacturing AHE, the federal minimum wage reached a peak of roughly 55% in 1968. The Minnesota minimum wage (large employers) has been less than that level for its entire history; at its current level, the Minnesota minimum is about 46% of manufacturing AHE.

Where the Minneapolis and St. Paul minimum wages (small employers) are concerned, a pattern arises similar to those in Figures 2 and 3. The initial levels of these minimum wages (for 2018 and 2020) are less than 50% of manufacturing AHE. However, by the time the Minneapolis and St. Paul minimums reach $15.00, they will be about 66% of manufacturing AHE, substantially above the 55% level reached by the federal minimum in 1968.

The minimum wage relative to hourly wages of nonfarm workers

Figure 6 gives another perspective on minimum wages relative to other wages in Minnesota. It shows the minimum wages for Minnesota, Minneapolis and St. Paul against different percentile hourly wages for Minnesota nonfarm wage-and-salary workers for 2018 to 2028.

Figure 6. Minnesota, Minneapolis and St. Paul minimum wages and selected Minnesota percentile wages, projected, 2018-2028

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For the entire period shown, the Minnesota large-employer minimum wage is somewhat less than the 10th-percentile wage of Minnesota nonfarm wage-and-salary workers. The story is different for the Minneapolis and St. Paul small-employer minimums:  both of these minimums begin at levels below the 10th percentile and then rise until they are about equal to the 25th percentile in 2024 for Minneapolis and 2026 for St. Paul.

The percentage of jobs at or below the minimum wage

Another perspective, similar to that of Figure 6, directly considers what percentage of jobs pay the minimum wage or less. Figure 7 shows the percentages of jobs at or below the minimum wage for Minneapolis, St. Paul and the balance of state. It shows the percentages for 2019 for all three areas and, for Minneapolis and St. Paul, the years in which the new, higher, minimum wages in those cities will become equal for employers of all sizes.

Figure 7. Projected percentages of jobs at or below minimum wage, Minneapolis, St. Paul and balance of state

Missing media.

For 2019, because of the different minimum wages for large and small employers in Minneapolis, the estimates for that city consist of upper and lower bounds corresponding to the large- and small-employer minimum wages (see note 5 in Figure 7). For Minneapolis for 2019, the percentage of jobs estimated to be at or below the minimum wage is 12.5% at the upper bound and 7.8% at the lower bound. Combining this with the results for St. Paul and the balance of state gives upper- and lower-bound estimates of 8.8 and 8.3% for the overall state. The number of jobs at or below the minimum wage for the state for 2019 is estimated to be between 244,000 and 260,000.

For Minneapolis for 2024, when all of its employers (as of July 1 of that year) will be paying a projected $15.35 minimum wage, an estimated 17.7% of jobs will pay this rate or less. For St. Paul for 2028, when all of its employers (as of July 1 of that year) will be paying a projected $16.33 minimum wage, an estimated 21.2% of jobs will pay this rate or less. The percentage at or below the minimum wage is lower in Minneapolis than in St. Paul because general wages are higher in Minneapolis. For 2010 to 2017, the average weekly wage was about 20% higher in Minneapolis than St. Paul.5

One issue with the wage detail data, from which these estimates are derived (see note 4 in Figure 7), concerns the computation of hourly wages for individual jobs. The hourly wage is computed by calendar quarter as earnings for the quarter divided by hours worked for the quarter, both reported by the employer. An examination of the data reveals that hours worked are often underreported, in many cases apparently because the employer mistakenly reports weekly hours rather than quarterly hours. To the degree that this occurs, hourly wages are overstated, and so the number and percentage of workers at or below the minimum wage (or any wage threshold) are understated. The degree of understatement is unknown.

Contact

For more information, contact David Berry at david.berry@state.mn.us or 651-284-5208.


1www.sba.gov/advocacy/firm-size-data

2As in Figure 2, there is a slight downward drift in the constant-dollar values of the Minnesota minimum wage after 2019 and of the Minneapolis and St. Paul minimum wages once inflation-indexing has begun for them. As in Figure 2, the reason is that the index used to increase the state and city minimums is projected to increase less rapidly than the index used in Figure 3 to express the trends in constant-dollar terms.

3The comparison would be the same if the poverty thresholds and earnings amounts were expressed in 2028 dollars.

4It would be preferable to use a broader wage measure, ideally the average or median wage of the overall state economy, as the basis for comparison, but such a measure is not available for the period concerned.

5Computed from the Quarterly Census of Employment and Wages, available from the Labor Market Information Office of the Minnesota Department of Employment and Economic Development (mn.gov/deed/data/data-tools/qcew).