by Cornell Bang
The effort to increase the minimum wage at the federal, state, and municipal level continues to gain momentum. At the municipal level, Los Angeles voted in 2015 to increase its minimum wage from $9 an hour to $15 by 2020, San Francisco voted in 2014 to raise its minimum wage from $12.25 to $15 an hour by 2018, and Chicago voted in 2014 to bring its minimum wage from $10 to $13 by 2019. Furthermore, several presidential candidates have stressed the importance of increasing the national minimum wage. Hillary Clinton has advocated for $12 per hour, Bernie Sanders and Martin O’Malley have proposed $15 an hour, and Ben Carson proposed indexing the federal minimum wage, which means adjusting it on a regular basis to reflect the rising cost of living.
Increases to the minimum wage have always been controversial. Some observers believe that minimum wage increases have an overall negative impact on economic growth by causing businesses to lay off employees, raise prices, or relocate to less expensive labor markets. On the other hand, some argue that increases to the minimum wage can stimulate economic growth by giving consumers more purchasing power and save companies money on recruiting and training expenses by reducing turnover. Economists have studied this controversial issue at length but have yet to come to a consensus on data that proves either theory.
What happens when business expenses increase?
The most prevalent argument against increasing the minimum wage centers on how labor costs will skyrocket, which will cause employers significant losses and potentially jeopardize the employment of low-wage workers. Labor costs typically constitute the largest portion of business expenses. Thus, business owners naturally question how they are supposed to survive if that expense increases even more. Former McDonald’s CEO Ed Rensi has claimed that a $15 hourly minimum would lead to between 15% and 20% of small businesses having to close their doors. Michael Reich, a professor of economics at University of California (UC) Berkeley, argues differently. According to Reich, when wages are higher, employees stay in their jobs longer, which saves employers the expense of hiring and training new workers. According to Rick Karp, a small business owner of five hardware stores in San Francisco, paying higher wages reduced his turnover and allowed him to provide higher-quality service.
Another concern is how an increase in labor costs will drive up the price of goods and services. Economists assert that businesses will raise prices to cover the increase in labor costs. That may be true to an extent, but economists like Reich argue that restaurant prices increase on a one-time basis of about 0.7% for each 10% increase in the minimum wage. That means a Big Mac that now costs $5 would set you back about $5.14 if the federal minimum wage increases from $7.25 to $7.97.
An increase in prices isn’t enough to deter the consumer market, Reich argues. In fact, a federal wage increase would motivate the consumer to purchase more. Consider the fact that the current federal minimum wage, when adjusted for inflation, has lost approximately 8.1% of its purchasing power. An increase in the federal minimum wage to just $10 an hour would restore the loss of purchasing power and give consumers the ability to purchase goods and services more frequently.
An objective outlook
The good news is that as municipalities such as Los Angeles, San Francisco, and Chicago impose minimum wage hikes, economists will have new sets of data to analyze. It’s likely that such data will lead to a more precise understanding of how raising the minimum wage would affect businesses elsewhere.
It should be helpful for business owners to watch the new information that surfaces as minimum wage increases come to fruition across the country. Objectively weighing the evidence can help businesses make decisions based on accurate information if a minimum wage increase goes into effect in their area.
Cornell Bang is a labor analyst for F&H Solutions Group. He can be reached at cbang@fhsolutionsgroup.com or 408-914-8480.