How small business will be affected by a raise in the minimum wage

AND THERE IS THIS

The push from the White House

I want to start with the exact words that were recited by our current president in his speech during the State of the Union in regards to this subject:

“Of course, nothing helps families make ends meet like higher wages…and to everyone in this Congress who still refuses to raise the minimum wage, I say this: If you truly believe you could work full-time and support a family on less than $15,000 a year, go try it. If not, vote to give millions of the hardest-working people in America a raise.” –President Obama, State of the Union address, Jan. 20, 2015

At the end of this presentation you will be able to answer these questions

Are we hurting small business with such legislation?Are people really going to benefit from this measure?

They want to raise the

minimum wage nationwide

between $12 to $15 an hour by

2020

The federal minimum wage has been set at $7.25 an hour since 2009.

Wages for workers on all new federal contracts are $10.10 or higher

Going to $15 an hour represents a 50% rise from California's current minimum pay of $10, and a 67% jump for New York's current minimum pay of $9.

Currently the minimum wage varies state by state.

It is important to acknowledge that

the impact to business is diverse

as not every business will be impacted as greatly as others.

For example, the impact of a minimum-wage increase on a restaurant or motel

owner would be far greater than the impact on a law firm or other operation, where employee wages

already exceed the suggested minimum wage

increase.

Taking actionThey are pushing for an experiment with potentially deep consequences — some good, some bad — that could extend far beyond the borders of the nation's states, with ramifications for the health and direction of the U.S. economy and society.

They argue that by raising the minimum wage nationwide will increase earnings for millions of workers, and support the local economies where they live, work and spend their earnings.

Rallies have taken place many cities across the country from California to New York

The experiment

What a $15 minimum wage means for US small businesses?Nearly all of of the attention focuses on corporate franchises such as McDonald’s, and big retail chains like Walmart, raising the minimum wage could also have a big impact on small businesses across the country, which employs nearly half of America’s private sector workforce. Raising the minimum wage is often cast largely as a necessity to ensure that many workers are able to earn a decent living. But it’s also a complex issue with implications beyond those who flip burgers, clean offices and bag groceries.

Now let’s take a close look at the City of Seattle, WA

The Rainy City

Seattle, the first big US city to pass a $15 minimum wage, began phasing in higher wages - in a planned decade long transition. So far there is mix data on the results of the measure but there is a small increase in the unemployment rates following the year the hike took effect and a few business closures. But these changes haven’t been too dramatic to make a solid statement. However some business owners did have to make some adjustments:

Seattle Restaurants Association “Before the wage increase, a typical cost breakdown for Seattle restaurants was: 36 percent of funds devoted to labor, 30 percent to food costs, 30 percent to other operating costs, and the remaining 4 percent was profit margin. However, under the minimum wage increase, if a restaurant owner made no changes, labor costs would rise to 42 percent in quick service restaurants and 47 percent in full service restaurants”.

The Adjustments

To raise wages to $15 an hour, Aunt Mary’s Cafe instituted a 15% service charge, 60% of which goes to the servers while 40% to the kitchen crew. The manager, said: “I support raising the minimum wage. But the overhead cost has gone up because people in your supply chain have raised their prices in response to the new minimum wage. How else can small businesses cover the cost?

Pawsitively Perfect Pooches owner “We employ up to ten people at any given time and increasing the minimum wage almost ruined us. We provide a service – dog walking – and are already at the max of what clients will pay. There is no room for an increase’’.

Short and long term effects in Business

Increased cost of operation

Increase of price of services provided

Changing the hiring policy

Deep cuts into the business profits

Less employee benefits

Shorter business hours

Eliminate some full time positions

Increased cost of operation

● The cost of products will be higher since everyone more than likely will

raise their product prices to be able to keep up with the wage hike.

● Higher minimum wage likely would generate an increase in workers

compensation related costs for employers, based on increasing payrolls

and higher indemnity benefits that are based on the average weekly wage

of workers.

● Landlords will use this as an opportunity to raise the rent on business

leases.

Increase in price of services provided

● Business will be forced to make up for lost revenue and they will do so by raising the prices of the products and services they provide.

● Small business can’t afford to take the hit, so they will pass that on to consumers by gradually raising the prices.

Changing the hiring policy

The biggest chunk of the minimum wage workforce are people with a high school education or less. If the minimum wage went to $15, business would have to hire someone with higher skill sets and management experience.

The less skilled, less experienced, and less educated worker will have a hard time finding a job.

Management will be reluctant to replace workers who leave, and will be demanding more from those who stay.

“It’s better to be hired at $10 than not to be hired at $15”

The cripple effect:Startup companies and small business

Newly opened business would be put out of business quicker than what the statistics predicts (this apply to all businesses) “It states that 1 out of 12 business will not make it past the first year, and that number goes to 1 out of 6 businesses won't make it to the 4th or 5th year. Small business will not be able to survive the first 5 years with such a high cost to be able to stay afloat.

Let’s talk about “Quality”

Let's say a business is dedicated to provide its customers high quality food at the lowest price they can, but they won’t be able to provide that anymore due to an increase in the cost to run the business. They will have to in most cases raise the prices and pass that burden on the customer.

We will see a decrease in the number of businesses in the 20-employee range because it will be really hard to make it because of the cost of operations.

Here’s a quick example

At XYZ Hardware, the owner says his 2015 revenue reached $3 million while wages and benefits accounted for 30% of his overhead. As the minimum wage rises to $15, that’s a 50% increase and would increase to 45% the overhead.

He will need to hike wages for his 32 full- and part-time workers who now earn between $12 and $18. In theory, that means he’ll have to absorb a 40% increase in wages over a four-year period for more than two-thirds of his staff.

Research supporting the hike

Article from Forbes Magazine:

“Research into the effects of higher minimums is conflicting and inconclusive. One frequently cited 1993 study, co-authored by Alan B. Krueger, a Princeton economist, surveyed fast food restaurants in New Jersey, which had increased its minimum wage above neighboring Pennsylvania, and found that New Jersey’s hike increased employment rather than depressing it. But Krueger recently published an op ed saying he believes that, while the economy can absorb a $12 an hour federal minimum, a $15 minimum could have negative consequences (he did say that he thinks some high-wage cities and states could probably absorb it)”.

Research opposing the hike

“Meanwhile, Forbes contributor Tim Worstall and U.C. Berkeley economist Michael Reich are certain that a $15 minimum will devastate the California economy. They concluded that a $15 minimum wage will result in a modest job loss and an economic slowdown in the city of Los Angeles (the study predicts a modest job gain in LA County). A 2014 study for San Francisco’s Office of Economic Analysis found that a $15 minimum would benefit the local economy by boosting the spending power of low-wage workers, but acknowledged that it could result in 15,000 fewer jobs by 2019”.

“Forbes Magazine”

And for the finale

I strongly believe that a legislation that raises the minimum wage nationwide to a high of $15 will cripple the small business owners, which for the most part do not have the right amount of capital to stay afloat if such measure is taken. Remember that they aren’t making thousands and thousands of dollars in profit.

Instead the government could find other alternatives to solve the problem of income inequality, but they need to focus on better programs for the lower classes, cut the cost of higher education and technical schools in this country, and make it easier for people to get a better education. Because at the end, no matter how much money people make if they lack education they will waste their money in unnecessary things, and continue to live paycheck by paycheck.

Sources