The March Towards a $15 Minimum Wage: What Would It Mean for Business Owners?

November 11, 2017

Over the past few years, many U.S. states and some cities have passed minimum wage laws that not only greatly exceed the federal minimum wage, but every year march closer to the stated goal of a $15 minimum wage.

The first minimum wage was introduced in 1912 here in Massachusetts, because of the ‘Progressive Movement’, aimed to improve American working conditions and wages. The Federal minimum wage of $.25 per hour followed in 1938 under the Fair Labor Standards Act (FLSA) and so it continues into today. It is a fact that the minimum wage has not kept up with inflation, and that improvements in productivity have outpaced it.

The reasoning behind today’s march to $15 is simple – to bring the annual wages of an employee paid the minimum wage not only above the federal poverty line, but also to bring those employees into economic relevance and out of Federal and State dependency. From a human perspective, this is a meaningful and noble goal – to essentially end wage inequality through the use of government mandates. It is expected, by these arguments, that a $15 minimum wage will help to create jobs and as a result, grow the economy.

But, is that the only impact raising the minimum wage would have? If you asked a business owner who has minimum wage employees, they might have a different perspective. So might consumers.

They might argue that the employee who makes $7.25 (or whatever their local state’s minimum wage might be) does not offer skills commensurate with compensation of $15 per hour. In that instance said employee may become unemployed. This would contribute to decreased jobs, not increased jobs.

It should also be noted that regional costs of living don’t seem to be taken into account by some lawmakers who are championing the $15 per hour cause, making the new rate a real windfall to some in lower cost states who would benefit by it.

The small business owner might argue that work that previously cost them $7.25 per hour is now more than doubled. So, the cost of the same work (let’s use 40 hours as an example) which represented an expense of $290, now cost $600, which means an increase in cost of 106% may not only eviscerate profit margins, but actually increase further due to the employer taxes due on the new wages. If we assume employer taxes at 12%, the actual real cost of that work is $672.

On a microeconomic level, this increase in costs would likely mean a resulting increase in cost to the consumer of the company’s products and services, and likely a decrease in the overall company’s sales because of the cost increase. As an example, the price of a cup of coffee went up by 20% in Oakland, CA, after a 36% minimum wage hike in the city. It’s been proven that consumers will flock to the lowest price goods, no matter where they come from, whether it be a city with a lower minimum wage, or a factory in China with no minimum wage at all.

This produces two results: that the company needs fewer workers to create fewer products and services – which would result in a decrease in jobs. On a macroeconomic level, it might mean that the company, which does not wish to increase their prices, moves their production overseas where there are no or few minimum wage jobs, or automates using technology (think robotics, etc.) to become more efficient. This would also result in a decrease in jobs.

First to be impacted, of course, would be the small businesses whose other non-payroll costs are likely higher than their national and regional competitors who have the benefit of bulk purchasing based on their volume. They would likely have a need to lay off workers or eventually close altogether to contend with such a drastic swing in their costs.

Smaller businesses are 99% of US Employers, and represent just under 50% of the jobs. 64% of new private sector jobs come from small businesses. What happens when you force the profit and loss equation into a loss solution by doubling the minimum wage? The paradigm changes and there’s no reason for those smaller businesses to exist.

While the support for a higher minimum wage is a popular and obvious notion, to do so might have a significantly negative impact on the small business infrastructure in the US. It’s great to be paid $15 per hour, but if there are 15 people to fill each one of those jobs, the negative economic impact for the other 14 would be a disaster.

Mathematically, you can only slice up a pie to 100% of the pie. It seems with a $15 minimum wage, slicing to more than 100% is the premise.

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