MainStreet Explains: Small Businesses and the Minimum Wage Hike

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At a time when the economy is reeling from declining corporate profits, sagging consumer spending and job losses, the country’s lowest paid workers will be getting a raise.

Whether you’re a minimum wage worker at Joe’s Small Business or McDonald’s (MCD), the minimum pay for low-wage earners make will rise 70 cents to $6.55 on Friday. The hike is the second of a three-stage increase of federal minimum wage that began in 2007, when the federal minimum wage was increased for the first time in ten years to $5.85 an hour. The minimum wage eventually will rise to $7.25 in 2009.

While this is celebratory news for many workers, the hike’s potential impact on small businesses and consumers in the 26 states affected by the increase—many states have minimum wage requirements that are above the federal rate—is less clear-cut.

“Seventy to 80% of small business costs are labor costs, and so raising the minimum wage requires owners to pay more money for the same output,” says Bill Dunkelberg, professor of economics at Temple University. That means “unit labor costs will rise and they will either have to raise prices or they will have to reduce profits.”

On the other hand, some say putting more money in the hands of lower income people could be just the stimulus the economy needs.

“It’s a welcomed benefit to low-income [people], and gives them more money to infuse into the economy,” says James Parrott, an economist for the Fiscal Policy Institute, a nonpartisan research and economic policy company based in New York.

The increase in wages means an individual earning $12,168 for a 40-hour work week will now make $13,624—still well below the U.S. poverty level for a family of four, according to the Census Bureau.

“The reality is that employers were paying just that minimum,” says Mary Gable, a policy analyst at the Economic Policy Institute, an economic research company based in Washington, D.C.

There are costs to doing business and one of the costs is wages, Gable says, noting the federal minimum wage is not indexed to inflation. “Just like materials go up with inflation, we’d like to see workers get an increase,” she says. “Workers are trying to make ends meet as well.”

In a 2006 report by the Fiscal Policy Institute, there were suggestions that “employers are likely to respond to a wage increase by improving the skills of their workers and becoming more efficient, and that slightly higher wages would be offset by savings from reduced turnover and higher productivity.”

But Dunkelberg questions the idea of employee retention.

“They can still move because they can get the same minimum wage elsewhere,” he says. “If you raise the minimum wage, it’s the same everywhere, so I have the same incentive to move elsewhere. It doesn’t really help me on the training and retraining rehiring costs.”

Thus far, every study has shown no negative measurable impact for the rise in pay, says Gable.

“Most employees are able to absorb the costs through higher productivity,” she says. “If you do a decent day's work, then you should get a decent day's pay.”

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