The Ongoing Debate: Increasing the Minimum Wage

minimum wage debate in united statesProponents of a higher minimum wage point out that the current federal minimum wage of $7.25 per hour is too low to provide for a basic livelihood. They argue that a higher minimum wage will help create jobs and grow the economy. They also contend that most Americans, including a slim majority of self-described conservatives, support increasing the minimum wage.

Opponents counter that far too many businesses are not able to afford paying their workers more. If they had to by federal fiat, they would be forced to close their doors, lay off workers, or reduce hiring. They argue that increases have actually been shown to make it more difficult for low-skilled workers with little or no work experience to find jobs or to rise economically.

It is a debate that runs the gamut from economic theory, to business best practices, to ethics and political ideology. And, unfortunately, too often race and political principles are dragged into the debate at the expense of constructive consensus building.

The Argument for a Higher Minimum Wage

The Economic Policy Institute argued back in late 2013 that a minimum wage increase from the current rate of $7.25 an hour to $10.10, or almost 28 percent, would add a net of $22.1 into the U.S. economy while creating about 85,000 new jobs over a three-year phase-in period.

Earlier that year, two economists from the Federal Reserve Bank of Chicago supported that assumption when they calculated that only a $1.75 rise in the federal minimum wage to $9.00 an hour would increase aggregate household spending by $48 billion the following year.

And a 1994 study by economists and PhDs Alan Kruegerand and David Card compared the local fast food industries of New Jersey and Pennsylvania after New Jersey raised its minimum wage by 80 cents. Pennsylvania did not have an increase. The authors of the study observed that the subsequent fast food industry job growth remained similar in both states and concluded that there was "no indication that the rise in the minimum wage reduced employment."

argument for government mandated minimum wageThere is also an argument based on the improvement of individuals hovering at or below the federal poverty level of $12,331 for a one-person household under 65 years of age and the 2015 federal poverty level of $16,337 for a single-parent family with a child under 18 years of age.

According to a 2014 Congressional Budget Office report, simply increasing the minimum wage to $9 would lift 300,000 people out of poverty, and an increase to $10.10 would lift 900,000 people out of poverty. Those numbers would vary somewhat today as the Federal Poverty Level or FPL is adjusted over time.

In addition, since the federal minimum wage is not indexed for inflation, its purchasing power has dropped considerably since its peak in 1968. Back in 1968 the minimum wage was $1.60 an hour, which is 53.9 percent higher than today's $7.25 federal minimum wage and equates to $11.16 in 2016 dollars.

Unfortunately, the federal minimum wage lost 8.1 percent of its purchasing power because of inflation between the last increase in the minimum wage in 2009 and July 2015.

Opponents of a Government Mandated Minimum Wage

In February 2014, the Congressional Budget Office projected that a minimum wage increase from $7.25 to $10.10 would result in a loss of 500,000 jobs. This is somewhat contrary to the projections of The Economic Policy Institute from a year earlier.

In 2014 a survey of 1,213 businesses and human resources professionals by Express Employment Professionals revealed that 38 percent of employers who were then paying minimum wage said they would lay off some employees if the minimum wage was raised to $10.10 and 54 percent said they would decrease their hiring.

argument against higher minimum wageMeanwhile, in California, San Francisco's Office of Economic Analysis released their Increasing the Minimum Wage: Economic Impact Report," in July 2014. The report noted that an increase to $15 would reduce the city's employment by about "15,270 private sector jobs.”

Adding to the controversy, Steve H. Hanke, PhD, a Professor of Applied Economics at Johns Hopkins University, surveyed the 21 European Union (EU) countries that had a minimum wage in 2014 and found an average unemployment rate of 11.8% in these nations. However, the seven EU countries that did not have a minimum wage, had only 7.9 percent average unemployment rate, about a third lower.

Opponents also caution that raising the minimum wage at the federal level fails to consider regional cost-of-living variations which could hurt low-income communities if the minimum wage is raised.

Armed with these and other similar statistics, opponents of increasing the minimum wage have seemingly succeeded in stalling any federal attempt to up the national pay floor. However, in certain states and in several cities, counties and other locales, supporters of a “living wage” have prevailed.

A common view held by opponents of a government mandated increase in minimum wage is articulated in a post at Americasfuture.org:

“The perennial economic argument for a living wage runs like this: if companies put more money into the pockets of workers they will spend it, which boosts profits and the economy. This is the equivalent of the government fiscal multiplier argument. And, like that argument, if you follow this one to its logical conclusion you can see how nonsensical it is. If a living wage of $15 per hour will boost the economy, why don’t we raise it to $20? Or $30? Then the economy will really take off!  This argument overlooks the fact that prices — and a wage is the price of labor — reflect value; they do not set value. Employers pay workers based on how much value they add to the business. Forcing an employer to pay an employee $15 per hour when they only add $8 per hour worth of value is a recipe for bankruptcy.”

The Business Impact of an Increasing Minimum Wage

While the argument for increasing the minimum wage is that the pay floor should reflect the continually rising cost of living. While this is a consensus among advocates for a “living wage”, how much the minimum should be increased depends on who is asked.

On the other side of the argument is that across the board wage increases mandated by the federal or even state governments will inevitably incur often unintended consequences. Despite the promise of higher wages and, therefore, increased disposable income, minimum wage workers often suffer consequently from these unintended effects.

For example, one study showed that when California implemented a 10-percent minimum-wage increase, there was a corresponding 1.2 percent decline in new low-wage workers. The analysis indicated that, although most minimum wage workers kept their jobs and received the increased pay, many employers were either creating less or filling fewer minimum-wage jobs.

minimum wage increase impact on restaurantsIn numbers of states where the minimum wage has been increased significantly, the financial impact has been very immediate and burdensome for small business owners. This has been especially evident for restaurants. According to one source, net profit margins in the restaurant industry are unusually thin and vary from around 2 percent for fast food restaurants to around 6 percent for casual and full-service establishments.

Most employees in restaurants of any type or size are typically minimum wage earners. And, in states like California, there are typically a disproportionate number of workers from certain ethnic groups. Since most restaurants spend anywhere from 25 to 40 percent of their overhead on payroll, a 10 percent increase in payroll costs can drastically diminish or even eliminate any net profit.

This unintended economic impact can have a significant ripple effect in a state’s economy. California, for example, is home to the largest restaurant industry in the country. Restaurant revenue just from California accounts for almost 4 percent of the United States’ total gross domestic product.

Factor in the reality that, in California, Latinos have made up over 50 percent of California’s restaurant workforce as recently as 2015. If restaurant owners feel they must downsize or close down completely, this group of workers will feel the brunt of those decisions.

And this is not limited to the locally owned restaurants.

The Unintended Fallout of Minimum Wage Increases

After the first minimum wage increase in early 2017 Bob Wright, the CEO of Wendy’s, said the company expected wage costs to rise at least 4 percent. He said that Wendy’s had three options to offset the increase. According to an article at Business Insider,

First, they could cut margins, but with an 8% margin, that’s unlikely. The second option is to raise prices. Given how price-sensitive consumers are these days, that too is a non-starter. Finally, the firm could reduce the amount of labor they use… and that’s exactly what they did. Wendy’s eliminated 31 hours of labor per location, per week.

Seattle is a city that has more or less led the charge for a higher “living wage” and in 2014 the city council voted to phase in a $15 wage over the next few years. Seattle’s Minimum Wage Ordinance went into effect on April 1, 2015. The minimum wage was designed to gradually increase to $15 per hour based on the size of the business.

In June of 2017, an AP article noted that,

A University of Washington team studying the law’s effects found that the law has boosted pay in low-wage jobs since it took effect in 2015, but that it also caused a 9 percent reduction in hours worked, The Seattle Times reported. For an average low-wage Seattle worker, that’s a loss of about $125 per month, the study said.

While there are other studies that indicate the impact might be less costly, a similar scenario has been playing out in several other cities that have also implemented an aggressive minimum wage increase ordinance.

Other businesses simply chose to close their doors after concluding that their business models were no longer viable. This has happened repeatedly in places such as Seattle and San Francisco, for example, due to the higher minimum wage requirements.

Combating the Cost of Living May be Counterproductive

A secondary result of minimum wage increases is the subsequent incremental increase in prices for goods and services. Because many smaller businesses feel they are not able to absorb the higher overhead of increased payroll costs, they have chosen to pass some of that expense on to their customers.

In San Francisco alone it is estimated that there were over 142,000 minimum wage workers who received a pay increase in 2017, for example. In Oakland, there was an increase in payroll costs for the employers of another estimated 48,000 workers.

In total, the estimated increased cost for San Francisco and Oakland city employers was over $2,000,000 more in hourly wages paid just in a year's time. And this does not include increased payroll and employment taxes.

An additional dilemma for employers is that many cannot, practically speaking, give their minimum wage workers the mandated increase without giving a similar increase to low-wage or near-minimum wage workers. Again, this ripple effect impacts restaurant and food service business and workers disproportionately.  The result is that these companies find themselves having to give most or all their workers pay increases, which can be crippling for smaller businesses.

Minimum Wage Laws and HR Compliance

New labor law regulations, such as minimum wage ordinances, can increase both the costs and the risks for employers, requiring new workplace postings or changes to existing workplace policies. Because of this, it is recommended that all employers consult with experienced employment counsel to ensure payroll compliance. If you have any additional questions about minimum wage, check out our California Minimum Wage page for everything you need to know.

In addition, new management and compliance practices are required for every HR and every payroll professional. All of this can become burdensome and time consuming. But there are options.

Accuchex, a reputable payroll and workforce management services provider, can not only relieve you of the burden of your ongoing payroll process demands, but can potentially provide other cost-effective solutions, as well.

Call Accuchex Payroll and Workforce Management Services at 877-422-2824 to get your free Payroll Outsourcing Guideor click the button below and let us help you learn more about your labor law compliance needs.