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Raising Minimum Wages: A Double-Edged Sword

While raising the minimum wage puts more money into the pockets of low-wage workers, it also incentivizes employers to hold the line on job creation or even reduce employment.

Q2 2017
In the flurry of companies that are either vowing to create new American jobs or simply showcasing commitments they made before the election of President Trump, many are overlooking a huge countervailing factor in the job-generation dynamic: a spate of minimum-wage increases that are unfolding across the nation throughout 2017 and which can be expected overall to result in job cuts. Most of the pledges in response to Trump’s attention to the issue of American employment are coming from manufacturers — such as Intel, Boeing, and General Motors — whose factory jobs pay far above minimum wages. But as minimum wages rise around the United States, most of the jobs in the balance are low-wage positions in sectors such as quick-serve restaurants, retail stores, and hotels.

Minimum wages increased in 20 states at the start of the year, including four — Arizona, Colorado, Maine, and Washington — where electorates approved wage hikes in November. More cities also saw voters opt for boosts in minimum wages that make them high-compensation municipal islands. Meanwhile, the federal minimum wage of $7.25 an hour has remained unchanged since 2009. In Massachusetts, for example, the minimum wage will rise $1, to $11 an hour, affecting about 291,000 workers. In California, the minimum goes up 50 cents, to $10.50 an hour, boosting pay for 1.7 million people. Nationwide, about 4.3 million people across the country have been receiving a raise because they earn less than the new minimum where they live, according to the Economic Policy Institute.

There is no statistically significant relationship between raising the minimum wage and reducing poverty. The Federal Reserve Board of San Francisco Two Sides to the Issue
Economists and policymakers understand pretty clearly the two-sided nature of minimum-wage hikes: While they put more money into the pockets of low-wage workers, they incentivize employers to hold the line on job creation or even reduce employment. Also, by putting pressure on labor costs for employers, minimum-wage increases tend to be inflationary, discouraging consumers and hurting companies in other ways.

The stakes for many business leaders just got raised along with minimum wages. In Arizona, for example, a whopping $1.95 increase in pay hiked the new minimum wage to $10 an hour, which will mean a wage increase for one out of every nine workers. It’s the biggest jump among the 20 states and one of the largest increases ever enacted.

So it will crimp employers in some fast-growing industries with relatively low wages, such as call centers. Arizona has added call-center employment faster than just about anywhere else in the nation lately, with about 133,000 jobs in the sector, according to King White, head of Site Selection Group, a Dallas-based economic development consulting firm. More than half of those jobs currently are compensated at less than $14 an hour.

“If today you’re paying $10 an hour for a call-center worker,” White says, “it’s the same wage that someone flipping burgers is going to make. It’s really going to put pressure on that $10 an hour no longer being acceptable, and for quality you’re probably going to have to bump the wage up to $12 an hour or even $14 an hour. Many call-center operators will have to increase wages and face a good 15 to 20 percent increase in their operating costs, or relocate out of the state to a place that hasn’t bumped their wages.

“The labor market is extremely tight, with lots of states increasing minimum wages. Prices are going to have to go up, and you’re also seeing interest rates go up,” King says. “Despite the optimism about the U.S. economy under Trump, there’s still a good chance all of this could set off some type of mild, quick recession.”

Causing Complications
Indeed, the effects of higher minimum wages this year already are causing complications in a sector of the U.S. economy that has been hit hard by general economic uncertainty in the last few years: quick-serve restaurants. Many fast-food chains have been struggling lately to gain monthly sales increases in “comp” stores opened at least a year. And even before the new wage increases in 2017, rising labor costs were creating a huge pincer effect that was squeezing many companies in the sector.

Despite the optimism about the U.S. economy under Trump, there’s still a good chance all of this could set off some type of mild, quick recession. King White, head of Site Selection Group “The biggest pressure in the quick-serve industry is on labor costs,” Cheryl Bachelder, who then was CEO of Popeyes Louisiana Chicken, said last summer in a TV interview. “They are going up rapidly on the coasts and in big-city markets. We’ve got to be careful about not moving on wages too quickly. For our guests, we want fair prices, and for our people we want fair employment opportunities and fair wages. Caution and conservatism on how fast we go on wage rates will keep the economy thriving and give the best opportunity to our guests.”

Bachelder also underscored that fast-feeders weren’t just going to sit still and allow a consumption slump amid rising wages to ruin their businesses: They are responding with various methods of eliminating or holding the line on job numbers, including mobile ordering and mobile payments “that actually reduce the number of interactions” with humans, she said.

Yet many small operators are running out of ways to absorb or mitigate increased labor costs, Willie Degel, CEO of New Old World Restaurant Hospitality Group in New York, told Restaurant Hospitality. The minimum wage in New York City, where the company operates several eateries, increased to $11 an hour at the beginning of the year and will rise to $13 an hour at the end of this year.

“When the dishwasher goes to $11 an hour, the broiler guy is going to want $25 an hour,” Degel told the magazine. “How can you afford this? The consumer is not ready to pay the prices for this.”

And neither are many employers. Raising the federal minimum wage to $10.10 an hour from $7.25, for example, would reduce American employment by about 500,000 workers, concluded the Congressional Budget Office (CBO). Further, while higher minimum wages have become popular politically in states and cities around the country, their benefits will be very selective and not effective in “raising all boats” economically.

When the dishwasher goes to $11 an hour, the broiler guy is going to want $25 an hour. How can you afford this? The consumer is not ready to pay the prices for this. Willie Degel, CEO of New Old World Restaurant Hospitality Group CBO said that a significant number of people who are receiving minimum-wage hikes actually don’t live in low-income households. In fact, the office projected that with a $10.10 federal minimum, only 19 percent of the additional $31 billion in wages would go to families with household incomes below the poverty level, while 29 percent would go to families earning more than three times that level.

The Federal Reserve Board of San Francisco concurred: “There is no statistically significant relationship between raising the minimum wage and reducing poverty.” Research by labor economists Joseph Sabia of San Diego State University and Richard Burkhauser in 2014 “found no evidence that minimum wage increases were effective at reducing overall poverty rates or poverty rates among workers.”

But at a time when American workers in general are raising their sights more than they have in a decade — many of them because of Trump, including many who voted against him — minimum-wage increases have continuing popular appeal.
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