This year, the debate of what employees should earn is happening in Washington as Congress considers a bill to raise the federal minimum wage.
Introduced by Sen. Tom Harkin, (D-Iowa), and co-sponsored by Rep. George Miller, (D-Calif.), the bill proposes raising the federal minimum wage from its current rate of $7.25 per hour — set in 2009 — to $10.10 by 2016. It is expected to be scheduled for a floor vote this summer. After 2016, minimum wage increases would be tied to inflation.
If approved, the wage would increase to $8.20 initially, and then to $9.15 the second year, and $10.10 the third year.
“That would be a big problem for us,” says Sherry Buckman, co-owner of Pride Pools, Spas & Leisure Products in Claxton, Ga., of the $10.10 proposal.
It isn’t that Buckman thinks workers shouldn’t see any increase. “I think that minimum wage is low,” Buckman says of the $7.25 amount, which is also the minimum in Georgia. “If anyone [is living on] just that, they’re on the poverty level.”
But an increase of $2.75 would have negative repercussions on small business, she says.
“It increases the cost of doing business,” says Todd McCracken, president of the National Small Business Association in Washington, D.C. “They either have to pass those costs on to their customers — and hope they’ll still have as much business as before. … Or they can see if they can reduce their workforce or reduce people’s hours.”
Many retailers say there are only two ways to offset what an increased minimum wage would cost them — cutting expenses or raising prices. Because of the recent recession, there’s not a lot of fat to trim, says Michele DesRochers, owner of DesRochers Backyard Pools & Spas in suburban Chicago.
“Ultimately, raising the pricing is your only option when that happens,” she adds. “It has to be passed on to somebody; it’s going to be passed to the consumer.”
The argument that’s often echoed in a minimum wage debate when business owners talk about raising prices to offset wage costs is “It’s just a dollar or two.” Supporters of a wage increase contend that the increase won’t hurt businesses as much as owners say it will.
On the surface, yes, an increase of a dollar or two per hour for each minimum wage worker seems to be the crux of the issue. But it often isn’t the whole story.
“When you talk about the employee’s wage, that’s a very different number than the employer’s cost to employ that person,” McCracken notes. “We have workers’ comp programs, we have the contributions by the employer to federal social security [and] Medicare taxes, we have the employment tax base we have to pay.”
So, if a full-time minimum wage worker goes from receiving $290 per week before taxes to $404, the cost to the small business owner isn’t just the extra $114 per week.
“The cost can often be double what [the worker is] actually receiving,” McCracken says.
That’s one of the concerns DesRochers has when talking about the possibility of the federal minimum wage going up.
“The overall cost is not only in the wage, it’s also in the unemployment percentages that you pay, it’s in the workers’ comp that you have to pay, it’s in the insurance that you have to pay for those workers,” she adds. “It might just be a dollar or two, but you can figure all those extra costs.”
Because of the climate in Illinois, DesRochers has about 15 to 20 seasonal workers each year, with only a handful of year-round, full-time staff.
Most of her part timers make $9 to $12 per hour, more than Illinois’ current minimum wage of $8.25 per hour.
It’s not only the direct effects of the minimum wage that DesRochers and the other business owners must think about with this debate.
While Buckman said she thinks an increase to $10.10 is a bit much, she would support an increase to $8.50 or $9, which is what she pays a couple of her part-time workers. All the other positions are paid more than the proposed amount of $10.10.
Which means, if the minimum wage increases, Buckman will eventually face a dilemma. “I’d have to bring those $8.50 people up to $10.10, and what do you do with the other people?” Buckman asks.
According to an analysis published by the Washington, D.C.-based Economic Policy Institute, a nonpartisan economic think tank, 16.7 million workers would see their pay increase in those three years. But, like the members of Buckman’s staff already earning more “another 11.1 million workers would be indirectly affected.” That phenomenon is the “ripple effect” of increased minimum wages, which benefit those making more than minimum wage who receive raises as employers adjust their overall pay ladders, according to the analysis.
That question is what causes wages to increase across the board for small business owners.
“If someone is paying someone say, $1.50 more than the minimum wage right now, and now the minimum wage goes up by $2, if [the business owner] only increases them to the minimum wage that person is going to feel like, ‘I went from $1.50 above minimum wage to minimum wage,’” McCracken says. That leads to a bigger increase for that worker and for others already making higher wages. “It can wind up really increasing costs in a business,” he adds.
Another challenge with that is the increased pressure retailers will feel from Internet stores.
“It puts companies that are most labor intensive — and those do tend to be brick and mortar companies — at a bigger disadvantage,” McCracken says. “… If you’re a company that has gone to a different model where you’re selling through the Internet and have more automated shipping and processing, then you have fewer workers and therefore these costs don’t affect you. So it does further exacerbate any of those competitive differences.”
One of those competitive differences that will lose some of its current weight is using higher wages to attract better staff.
“We pay more and expect more,” says Matt Gohlke, president of Gohlke Pools, located near Dallas. Texas’ minimum wage is $7.25 per hour currently, the same as the federal standard.
“The retail people currently start at about the proposed minimum wage [of $10.10],” Gohlke says. After six months, the retail workers also receive commission on everything they sell, with a premium commission for hot tub sales.
So while a rising minimum wage wouldn’t necessarily have to affect his wages, Gohlke says he would probably need to increase the hourly wage he’s offering to still be able to recruit the best staff possible.
When the minimum wage rises and starts to close the gap between the standard and the premium, it makes the recruiting process more difficult, McCraken says.
“It’s definitely a concern, because those companies that want to keep that competitive edge are going to have to pay even more,” he adds. “So even companies that think [raising the minimum wage] won’t affect them directly, it does wind up affecting them in ways they don’t often realize until they realize where they stand in the labor market to keep the best employees.”
The competitiveness of business is one reason the NSBA has the position that the federal government shouldn’t impose a minimum wage at all.
“We think competitive pressures will keep wages above a certain threshold anyway and will cause them to go up on their own without an artificial floor,” McCracken says. “But, clearly, the smaller the increase in the wage, the less impact it’s going to have.”
A big factor of acceptable minimum wages is the regional difference of the cost of living, which is one reason state legislatures increase the state wage above the federal minimum. The federal minimum wage has a long history of tilting the playing field across different regions of the country where dollars go further than others. In that respect, raising the minimum wage won’t always change anything, either.
“It will have simply no impact on some of the higher cost, denser cities,” McCracken says. “… Virtually no one in those areas pays minimum wage.”
Even if the federal minimum wage bill doesn’t pass, 2014 marks a year of many minimum wage increases. Fourteen states already passed upticks that took effect this year. Legislatures in Connecticut, New Jersey, New York and Rhode Island voted to raise the state minimum wages by as much as $1. Nine other states passed increases tied to inflation: Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington. California voted on an increase of $1 to take effect on July 1, making the new state minimum wage $9, with another $1 increase on Jan. 1, 2016.
The job creation debate
One point that supporters of a minimum wage increase often point to is that a higher minimum wage will create more jobs and pull people from poverty in the United States.
An analysis published by the Washington, D.C.-based Economic Policy Institute, a nonpartisan economic think tank, quotes research during the past two decades that modest increases “have little to no negative impact on jobs.”
The argument is that low-wage workers, to meet basic needs, will spend the extra income they earn per week, giving the economy a “modest boost” overall, according to the analysis. EPI research also showed enough increase in GDP to support 85,000 new jobs.
But Todd McCracken, president of the National Small Business Association, says he doesn’t see any good argument where jobs would be created.
“What I have seen some economists say … is that it could cause people to work who otherwise wouldn’t work,” he says. “Because right now, if you qualify for some sort of federal or state assistance program, whether it’s food stamps or something else, obviously the more money you make, the less you qualify for some of those programs.”
Working a minimum wage job for people in that situation doesn’t net them any difference than not working and using the program. However, McCracken says, a higher wage could mean that they would make more money working and could lower unemployment in that sense.
“That certainly makes a kind of sense, but [those supporting a minimum wage increase] aren’t factoring in … that it costs employers to reduce the number of jobs and hours worked at those jobs in many cases,” he adds. “So, I think on net, it doesn’t increase [the number of jobs].”
By The Numbers
3: The number of times Congress passed legislation to increase the minimum wage in the last 30 years.
10: The number of states that have annual cost of living minimum wage increases.
$290: The weekly wage of a full-time worker earning the current minimum wage of $7.25.
14: The number of states that increased their minimum wage in 2014.