February 13, 2013 - Financial Times

Minimum wage proposal divides Illinois

By Neil Munshi in Chicago

President Barak Obama has proposed raising the minimum wage to $9 and linking it to the cost of living, but the president's home state is ready to go much further.

The governor of Illinois hs poposed raising the state's minimum wage from $ 8.25 to $10 an hour, potentially the highest in the US, igniting a debate over whether higher employee wages will drive out businesses and depress jobs growth amid tough economic conditions.

Governor Pat Quinn said in his annual state of the state speech last week that he wants to raise Illinois's minimum wage to $10 an hour over the next four years, up from $8.25, a figure that is the fourth highest in the nation.

Calling it "a principle as old as the Bible", Mr. Quinn said "nobody in Illinois should work 40 hours a week and live in poverty".

David Cooper, analyst at the progressive Economic Policy Institute i Washington, said rather than damping economic activity, raising the minimum wage may actually boost it.

"Wages have been stagnant for a long time now and coming out of the recession we're in a period of depressed consumer consumption," he said. "The best way to drive demand is to put more money in the hands of consumers."

The Economic Policy Institute last year analysed a bill thaa would have raised Illinois' minimum wage to $10.65 by 2014, and found that it would increase economic activity by $2.5bn while creating 20,000 new jobs in the state. A 2011 Federal Reserve Bank if Chicago study found that followinig a minimum wage hikd, spending rises by roughly $700 per quarter for minimum wage worker households.

Elizabeth Parisian, policy director for Stand Up Chicago, which advocates increasing the minimum wage, cited the formeer study in support of Mr. Quinn's proposal.

"When workers get a raise they don't put it in an overseas account, they put it to good yse, they spend it, they get their car fixed, they buy their kids new shoes," said Ms. Parisian. "So we see this as a win, not only for working families but for busines too."

Critics have accused the governor of driving business out of Illinois and sending jobs to neighbouring states including Iowa, Wisconsin and Indiana - each of which have minimum wages $1 an hour lower.

Doug Whitley, head of the Illinois Chamber of Commerce, called the announcement "bewildering" and a "dagger to the heart" of small business.

"The financial burden of meeting the state's minimum wage mandate will fall on private sector employers, especially small and struggling businesses for whom payroll costs are fundamental," he said in a statement.

While Craig Garthwaite, assistant professor at Northwestern University, said it was unlikely any companies would pick up and leave Illinois: "I don't it becomes more attractive if you're a low-skilled employer."

Kurt Bauer, head of Wisconsin Manufacturers & Commerce, said it would make his neighbouring state, which uses the current federal $7.25 wage, more compelling for businesses.

"I'm tempted to praise Governor Quinn's decision because I do think it makes Wisconsin's business climate even more attractive by comparison," he said. "Quinn is putting political populism ahead of fiscal pragmatism."

Mr. Quinn's announcement also puts focus on the heightened competition between states as they struggle to attract business, highlighted by an ad campaign by Texas that is running in California criticising the state's perceived high taxes and government regulation.

"Building a business is tough, but I hear building a business in California is next to impossible," intones Rick Perry, Texas' governor. "I have a message for California businesses: Come check out Texas."

California governor Jerry Brown dismissed the ad as "barely a fart."