This week the editors of the Wall Street Journal cited a recent National Bureau of Economic Research study that concluded that minimum wage increases from 1989 to 2013 resulted in “lower bank credit, higher loan defaults, lower employment, a lower entry and a higher exit rate” for small businesses. The editors weren’t surprised, of course.
“Well, duh,” they wrote. “It does not take a University of Chicago Ph.D. to suspect that raising the price of labor will make it harder to sustain a small, labor-intensive business.” Raising the national minimum wage to $15 an hour, as many of the progressive presidential candidates are proposing, “ignore(s) the millions of small businesses that are trying to make payroll and grow” the editors conclude.
The study itself was definitely a “duh” moment. Of course, a $15 national minimum wage, which is not taking into account the significant variations in the cost of living across the country, would have an enormously negative impact on the almost six million small businesses that employ people.
We all know the reasons why. Higher wages that can’t be offset by increased prices kill margins and impact the long-term profitability and scalability of a typical small business. And, as the study found, the ability to make investments is confounded even further because those same businesses are defaulting on their debts more often and are less attractive for the financing they need.
And yet, the Wall Street Journal editors, as well as many other opponents of a minimum wage increase, are still ignoring another enormous factor – the most enormous factor – that would even further support their position: The effect of a minimum wage increase on all wages across the board.
“I’m paying guys on the factory floor well above the minimum wage,” one of my clients, the owner of a 100-person manufacturing firm located in Pennsylvania, told me. “But if the minimum wage goes up, I’m going to be forced to raise everyone else’s wage too and I can’t afford to do that.”
Why is that? It’s simple.
A typical factory floor worker at my client’s firm makes a minimum $15 an hour plus benefits. That wage is more than twice the national (and my state’s) minimum wage. But if the national wage goes up to $15 an hour, what’s he going to say? You know what he’s going to say. He’s going to say “$15 an hour? I’ve been working here three years and now I’m being paid an entry level wage? I deserve a raise too!”
So what does my client do? Would he be forced to double that worker’s hourly wage just to keep parity with the doubling of the national minimum wage? Perhaps. At the very least, my client would need to raise that worker’s wage if for no other reason than to compensate him for his experience and value to the company. And remember — an increase in wages also increases an employer’s payroll taxes, retirement plan contributions, bonus payments and other benefits tied to wages.
In short, a minimum wage increase doesn’t impact just minimum wages. It impacts all wages.
It’s a shame that governments have to step in and dictate what a business should be paying its workers. Good business owners don’t need the government telling them how valuable their employees are and that paying a decent living wage is the right thing to do. The good news is that the number of businesses who take advantage of the rules and underpay their workers make up a very, very small percentage of small businesses.
Regardless, there’s a trend towards more government influence on wages. More than 29 states already have higher minimum wages than the national $7.25 an hour average, and according to this New York Times report, when you take those states into account the average worker in this country is being paid about $12 per hour, even without a federal law.
Pennsylvania is not yet part of that trend. But that doesn’t mean my small business clients – including the client I mentioned above – isn’t preparing for the inevitable impact. Oh, he is.
He’s been saving and building credit and he’s planning on make some big investments in better machinery and more automation that will reduce the number of people he employs. Does he feel bad about that? Not at all, he told me. His compensation costs have already significantly increased over the past few years amid demands for more time off, better health insurance and higher retirement benefits dictated by this employee-driven labor market. An increase in the minimum wage – and its impact on all wages – would just force him to do what he’s got to do to stay in business.
“I’ll get machines to replace workers,” he told me. “I don’t feel bad. They asked for it.”
Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.