Is a Federal Minimum-Wage Hike Good for Business, or Does It Cost Too Much?

Is a Federal Minimum-Wage Hike Good for Business, or Does It Cost Too Much?

 

Roy Maurer By Roy Maurer February 5, 2019
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​Congressional Democrats' recently announced plan to raise the federal minimum wage has reset the stage for an enduring argument: Do minimum-wage increases lead to more prosperity or fewer jobs for low-wage earners?

Democrats in the House and Senate introduced legislation Jan. 16 that would gradually increase the federal minimum wage from $7.25 an hour to $15 an hour over the next five years. It would then be adjusted annually to reflect changes in the national median hourly wage.

The bill would also gradually increase the base hourly wage for tipped workers ($2.13 an hour) and workers under age 20 ($4.25 an hour) to $15 by 2027 and end the subminimum wage system used by some employers for workers with severe disabilities.

It has been 10 years since the last increase to the federal minimum wage took effect.  

Twenty-nine states and Washington, D.C., have minimum wages higher than the federal minimum, and some counties and other cities have set even higher minimum wages.

Many companies have also increased their minimum pay in recent years. In 2018, Amazon announced that it would increase its starting pay for its U.S. employees to $15 an hour, and Target said its workers would be paid at least $15 an hour by 2020. Walmart had earlier announced that its starting wage would be increased to $11 an hour.

Minimum-Wage Workers Are a Small Subset of the Workforce

  • In 2017, just 542,000 hourly workers earned the federal minimum wage, according to the Bureau of Labor Statistics. About half (221,000 workers) were age 25 or older.
  • Only 2.3 percent of the country's 80.4 million hourly workers earned $7.25 an hour or less, a drop from 2.7 percent the year before and 15.1 percent in 1980. This total includes those paid subminimum wages, such as tipped workers, some teenagers and workers with severe disabilities.
  • The percentage of workers earning the federal minimum wage or less today is well below the 15.1 percent recorded in 1980.

Advocates: Higher Wages Can Be Good for Business

Worker advocates argue that raising the federal minimum wage to $15 an hour will bring it closer to a living wage. They say it hit its high in 1968 at $10.15 an hour in 2018 dollars and has not kept up with the cost of living since.

The current federal minimum wage is a "poverty-level wage," said Judith Conti, the government affairs director for the National Employment Law Project, a worker advocacy group headquartered in New York City. "We have allowed the minimum wage to stagnate to an unconscionable level. Workers are more productive, prices are higher, the cost of living is increasing and the average wages for other workers are increasing, but so many workers at the bottom are stuck."

A minimum-wage increase would boost the economy, said Holly Sklar, the CEO of Business for a Fair Minimum Wage, a nationwide coalition of employers. "Workers are also customers. Increased pay means increased consumer buying power."

Raising the minimum wage will pay off in other ways, Sklar said. "Businesses that are more invested in their employees have employees more invested in the business. When workers are paid enough to live on, they don't have the continual stress that comes with figuring out how to provide for themselves or their families."

Michael Lastoria, the CEO of &pizza, a popular chain of pizzerias on the East Coast, wants to prove those points.

The starting pay at &pizza is currently a dollar or two above the state minimum (the eateries are mostly located in the Washington, D.C., area, with additional locations in New York City, Philadelphia and Miami), but the company intends to implement a starting wage of $15 an hour across its locations.

The reason: "When you take care of your people, they take care of your customers, and your business thrives," Lastoria said.

His company's absenteeism and turnover rates are "better than average," he said, but the real difference has been a boost in workplace culture.

"Our employee morale has skyrocketed and with it our customer experience and our bottom line. Happy employees drive sales. Customers coming back, engaging and re-engaging, increases revenue. Our employees have become our loudest brand ambassadors. People want to work for companies that they believe actually care about the greater good."

Opponents: Minimum-Wage Increases Cost Too Much

Opponents to raising the federal minimum wage—especially a hike to $15—say that it would burden small-business owners with increased operating costs and have negative ramifications for the very workers it's supposed to help. Others say a nationwide rate is not realistic, given the wide cost-of-living disparities across the United States.

Employer groups including the U.S. Chamber of Commerce, the National Federation of Independent Business and the National Restaurant Association all oppose a $15 minimum wage.

"The U.S. Chamber is open to a discussion on increasing the federal minimum wage, but … we oppose an increase of $15 or higher because it would bring serious negative consequences, such as a reduction of hours for current workers, the inability of first-time workers to find a job, and reduced operations for charitable nonprofits and organizations with limited revenue," said a spokesperson.

A $15 minimum wage would result in closed businesses, increased consumer prices or reduced labor costs, explained Tammy McCutchen, the former head of the Wage and Hour Division under President George W. Bush and an attorney in the Washington, D.C., office of Littler Mendelson. "Neither of those options help low-wage earners," she said.

A 2016 Heritage Foundation analysis based on data from the Bureau of Labor Statistics (BLS) and state minimum-wage schedules estimated that a $15 federal minimum wage would wipe out 7 million jobs. "Hardest hit would be workers, businesses and economies in areas with low costs of living," said Rachel Greszler, a senior policy analyst at The Heritage Foundation.

"The likely scenario is that employers with low profit margins will either have to cut working hours or fire some workers altogether. This pattern has played out countless times already."

Alfredo Ortiz, the president and CEO of the Job Creators Network, an Atlanta-based advocacy organization for small businesses, added that a $15 minimum wage could stifle younger workers from landing entry-level jobs. "Minimum-wage jobs have always been designed for younger workers with fewer skills and very little experience," he said. "The largest block of minimum-wage worker is teenagers. Doubling the minimum wage will make entry-level jobs more appealing to older workers looking to make a little extra money. With more experience, higher skills and maturity, they'll be competing against younger candidates who'll need more training and supervision."

Greszler said that one study of Seattle's minimum wage (which is at $16 an hour for larger employers) found that employers are weeding out workers with lower skills and experience.

Conti disputed that teenagers make up the largest group of minimum wage earners, pointing to research from the Economic Policy Institute which showed that the average age of affected workers is 35 and that only 9 percent of affected workers are teenagers.

Critics of a $15 minimum wage also said that increased consumer costs to offset rising payrolls would cancel out any increase to workers' buying power. Mandated higher pay would also likely expedite automation of more jobs.

"Robots will be the big winners," Ortiz said. "As technology advances and becomes cheaper to produce and deploy, many employers will seek to replace workers with automation. It's happening now, and that trend will accelerate under policies that arbitrarily increase the cost of human labor."

Regional Minimums

No states currently have a $15 minimum wage, and only three states—California, Massachusetts and New York—have passed future increases to $15.

"The Fight for $15 has had greater success at the local level, with Washington, D.C., and 18 cities and counties currently or soon to be at $15 per hour," McCutchen said. "What works on the coasts, however, could be economically devastating in the rural Midwest and South, where the cost of living is much lower." 

Rep. Terri Sewell, D-Ala., believes it's past time to raise the federal minimum wage but that legislating a national wage floor is inherently unfair. "The idea that Spokane, Manhattan and Selma should share the same minimum wage is nonsensical and unfair to low-wage workers everywhere," she said, comparing cities in Washington state and Alabama with the pricey New York City borough. "Instead, regional minimum wages would be based on the cost of living."

Sewell has proposed a system of regional minimum wages based on cost-of-living calculations from the BLS. Under her plan, the minimum wage in Selma would be set at $9.80 an hour, while it would be $11.30 in Spokane and $12.70 in New York City. The wage floors would rise with inflation so that by 2023, cities like New York City and San Francisco would reach $15 an hour. "States and localities could also pass their own laws to go above the regional minimum, as New York and San Francisco have done," she said.

McCutchen said that the time is ripe for "a modest and gradual increase in the minimum wage" if it were coupled with meaningful reforms to the Fair Labor Standards Act.

"There is a lot of middle ground between $7.25 and $15," she said. "If the Democrats really want to increase the minimum wage, they need to moderate their proposal to reflect economic realities in lower-cost-of-living states and in low-profit businesses such as retail, which could win enough support from Republicans to pass."

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