Profit Minded

Would Minimum Wage Hike Help or Hurt Small Business?

President Obama said on Tuesday evening that he will raise the minimum wage for new federal contracts to $10.10 per hour. And, in the case that a Democratic proposal to raise the national minimum to the same level or where state governments haven’t already raised the minimum (as 14 states have this month), the President urged private sector employers to take the initiative to raise wages on their own.

Many argue that the federal minimum of $7.25, unchanged since 2009, is not a living wage in the current economy. With the average price of a gallon of gas at $3.28 and a gallon of milk at $3.50, it’s hard to imagine how the 2 million or so people who earn that wage are able to support themselves, let alone families. MIT’s living wage calculator and anecdotal reports, including one describing a Hartford, Conn., Dunkin’ Donuts manager with three children, indicate they simply can’t.

A CBSNews report this week pointed out that “adjusted for inflation, $7.25 an hour is 23 percent lower today than it was in 1968. Several studies show that if the minimum wage had kept up with inflation and with the growth of average labor productivity over the past 46 years, it would be around $25 an hour.”

But some, including former Presidential candidate Ron Paul, Wisconsin State Representative Paul Ryan, and economist Mike Saltsman, counter that federally mandated wage hikes could make life even worse for low earners: they’d be laid off and replaced by robots, they argue.

As for how wage hikes would impact businesses, predictions are mixed, although most agree small businesses would feel any impact more deeply than large ones. On top of the costs just to bring $7.25-per-hour workers up to the new minimum, some employers worry that a mandated minimum wage increase would drive salaries and payroll taxes up across the board, as more experienced workers would require greater compensation too. Business owners would also face higher fees from business-to-business suppliers and service providers, who would raise prices to cover their own increasing payroll costs. Some small business owners say they’ll have no choice but to cut their own take-home pay.

But others actually believe they’d be in a better position if their low-earning customers had paychecks big enough that they could afford to purchase goods and services.

One fascinating perspective on the debate comes from Bernard Avishai in the New Yorker this week. While the Republican vs. Democrat split on the issue is predictable, many would be surprised to learn that it was socialist John Weston in 1865 who argued, as Ron Paul and Paul Ryan do today, that raising workers’ wages would “only make jobs more scarce and raise the price of bread,” according to Avishai. Weston’s intellectual opponent on the matter was Karl Marx. He argued, as some optimistic business owners do today, that increasing the lowest paid workers’ wages would trigger more spending by more people on necessities, while wage compression among the smaller top ranks would reduce spending on luxuries—an overall gain for the economy.

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