The debate over the impact of a higher federal minimum wage is back in the spotlight as President Joe Biden introduces a measure to double federal workers’ base pay — part of his $1.9 trillion COVID-19 relief plan to boost the ailing American economy. And, perhaps unsurprisingly, not all businesses are unified around the measure.
In a speech just over a week ago, the new United States leader said, “If you work for less than $15 an hour and work 40 hours a week, you’re living in poverty.” The current federal minimum wage stands at $7.25 an hour and has not seen an increase in more than 11 years.
According to some advocates, a raise in the hourly minimum could not only encourage consumer spending, but also reduce turnover, hiring and training costs for businesses. Opponents, on the other hand, claim that a higher wage could negatively impact job growth and creation or lead companies to shrink their payrolls and introduce more automation into warehouses and distribution centers.
What’s more, say those against a wage hike, the move could disproportionately hurt smaller and independent businesses: While large corporations might be able to dip into the coffers to provide for their network of tens of thousands of workers, many small business owners are unsure they can afford the higher minimum wage requirement. For most companies, the largest expense is labor costs — of which payroll is often the greatest component — and can account for as high as 70% of total overhead.
Big Fish vs. Little Fish
Currently, a number of major retailers across the country are already paying their workers a higher wage than the federal level. Amazon, Target and Costco are among the boldface chains that have already raised their lowest wage to $15 per hour, while Walmart’s starting pay is $11 per hour. (The big-box company improved wages for about 165,000 hourly workers — or roughly 11% of its U.S. workforce — in October as part of the rollout of a new operating model in its Supercenter stores.)
For a number of small business owners, however, a rise in the minimum wage could impact two critical areas of business: profit and productivity. Some say that higher base pay could force them to hike prices to maintain profit margins, which can drive away consumers, lead to a decline in revenues and ultimately provide employers less money for hiring.
“The fact that we even have the term ‘working poor’ in America is stunning,” said Sylvia Allegretto, an economist and co-chair of the Center on Wage and Employment Dynamics at the University of California, Berkeley. “But one of the biggest problems we have isn’t that we don’t have enough income or wealth in the country; it’s the distribution.”
She added, “You have Amazon and Walmart — the two largest corporate employers in the country — paying higher wages, but that doesn’t replace the need for [a higher] minimum wage policy. There are other people working in the retail sector who are left behind — and keep in mind these people are now working in very risky situations [due to the health crisis].”
Putting a Price on Productivity
Some insiders have argued that, since a significant percentage of retail work involves commission pay and other incentivizing tools, a higher minimum wage could reduce productivity among businesses.
At J&S Shoes Stride Rite, a brand partner of Stride Rite based in Silver Spring, Md., president Rick Gorinson said that none of his five employees are being paid under $15 right now, making hourly pay at his store more competitive to that of other retailers. A higher federal base wage, he explained, could potentially disincentivize workers from staying with one store.
“When you have an artificially high minimum wage, it could demotivate some people and make them less effective employees,” said Gorison, who will be in business for 41 years as of March and whose employees are currently eligible to receive bonuses of $6 or more per week if they hit certain goals.
He added, “Wages have to be a function of productivity, [and] our productivity is based on sales. That’s our only measure — and if sales are flat, then there’s a limit to what we can pay. When we’re forced to raise wages, we would absolutely have to cut hours.”
The same goes for Tony Chiappetta, who runs Chiappetta Shoes in Kenosha, Wis.: The family-owned retailer has been around for 100 years and currently employs about 16 people — all of whom make $15 or more an hour, save for one employee who is working under an internship program.
“A lot of people are going to expect a raise in conjunction with something like this,” Chiappetta said. “And it’s coming at a time when everything is incredibly difficult; it’s so ill timed.”
He added, “[A higher minimum wage] immediately hurts small businesses because they have less flexibility in absorbing costs — especially right now [amid the pandemic]. I might even have to think twice about having extra summer help or part-time workers.”
According to a 2019 report by the nonpartisan Congressional Budget Office, the minimum wage increase could end up bolstering the incomes of 17 million Americans, but between 1.3 and 3.7 million workers could become unemployed by 2025. Separately, in her confirmation hearing, Treasury Secretary nominee Janet Yellen threw her support behind the increase, telling senators that the move from $7.25 to $15 would have a “very minimal” effect on jobs.