Argument for Minimum-Wage Boost
Wendy Bounds, Wall Street Jrnl Some Economists Say Increases Help Small Firms Retain Workers, Compete July 27, 2004; Page B3 In the debate over whether to raise the minimum wage, opponents of an increase typically hold up small businesses as poster children, suggesting they will be unduly hurt from such a move.
But a leading pro-business advocacy group, a government research report and some economists offer arguments to the contrary. Among the evidence is that small firms do not provide a disproportionate share of low-wage jobs compared with larger ones.
In 1997, the last time the minimum wage was raised, small businesses with fewer than 100 employees employed about 54% of those workers earning at or near the minimum wage while employing about 52% of the aggregate labor force -- only a 2% difference, according to a report released by the Small Business Administration's Office of Advocacy. "These similarities show that the small-firm sector is not the low-wage sector of the U.S. economy as some have asserted," the report concluded.
What's more, for the many small businesses that already pay above the current minimum wage, some wage-increase proponents believe raising the wage base line will help these smaller firms better compete with larger rivals who pay employees less and can thus discount what goods and services they offer. They say there is currently greater pressure for entrepreneurs to pay higher wages to help reduce turnover and absenteeism -- particularly vexing costs to operations with already lean staff ranks.
Higher Minimums
The federal minimum wage is $5.15 an hour. Only 12 states, plus the District of Columbia, have higher minimum wages. In any state where there are differing state and federal minimum-wage laws, the employee is entitled to the higher of the two.
"The common knee-jerk reaction that a minimum-wage hike hurts small entrepreneurs is not a calculated economic response," says Kathryn Wylde, president of Partnership for New York City, a powerful nonprofit group of CEOs founded by David Rockefeller. The Partnership recently broke with tradition of many business-advocacy groups and came out supporting an increase of New York's minimum wage. Ms. Wylde cites turnover and training as key reasons why entrepreneurs are under greater pressure to pay more than minimum wage -- mostly because employees are constantly leaving to seek higher-paying jobs.
"This churning of workers is their single biggest expense," she says. What business owners might save in payroll expenses, they are losing in the "cost of recruitment, human resources and lost investment in training people to run the cash register when they'll be gone in six months."
Micah Damato, whose family runs the small gourmet New York City food shop A.L. Bazzini, already has $8 an hour as his lowest wage to help keep workers. But raising the minimum wage would make it harder for rival stores, who pay employees less, to compete with him on pricing, he says. "It levels the playing field," Mr. Damato says.
The minimum wage is a contentious political topic nationally these days. Presumed Democratic presidential nominee John Kerry has said he wants the federal minimum wage raised to $7 from its current $5.15 level. President Bush, meantime, has said he might support an increase so long as states could opt out -- an option designed in part, he has said, to protect small businesses. Opponents say such a move would effectively gut the law enacted in 1938. The last time federal legislation increased the minimum wage, in 1997, it was raised from $4.75.
And last week, New York's legislature in an unusual bipartisan effort, passed a bill that would raise the state's minimum wage to $7.15 by January 2007. That bill is awaiting action by New York Gov. George Pataki, who says he will look at it, although he has historically said he prefers any increase to be at the federal level to avoid putting New York businesses at a disadvantage with neighboring states.
Layoff Danger?
Many pro-business groups argue that raising the minimum wage will result in a swath of small businesses laying off employees. The National Federation of Independent Business, which has strongly opposed the proposed New York wage increase, has said that raising the wage disproportionately weakens small businesses because of accompanying rising costs, such as workers' compensation, Social Security and Medicaid taxes. The NFIB supports alternatives such as tax credits for heads of households as opposed to raising the minimum wage, which it says will "shrink job opportunities" for low-wage workers and place undue "collateral damage" on small businesses.
But two different reports raise questions about just how dire the damage might be. A recent analysis of the 12 states that have a higher minimum wage than the federal minimum showed that aggregate employment growth performed at least as favorably as in states where the $5.15 federal minimum prevails, according to the Fiscal Policy Institute in Albany, N.Y., an economic research group. And among small businesses with 50 or fewer employees, the number of establishments increased by 3.1% for the higher minimum wage states compared with 1.6% for the balance of the states.
Moreover, when the minimum wage was raised to $5.15 from $4.75 in September 1997, the total number of minimum-wage workers in firms with fewer than 100 employees stayed flat, the SBA's Office of Advocacy report says. "Our conclusion is that smaller firms were already paying higher wages in order to retain their workers," the report says.
In addition to employee retention, other factors put pressure on small businesses to pay closer to a "living wage" than their larger counterparts -- such as reducing absenteeism by making sure employees have disposable income for child care and commuting. Those with an annual personal income of $15,000 or less spent 6% of their income on commuting costs compared with those making $45,000 or more, who spent 2.2% of their income on commuting, according to a study released last year by the U.S. Department of Transportation.
"The economic evidence is pretty clear that if you get paid enough and have a good attitude about working somewhere, then you are less likely to not show up for work and not shirk your duties," says Jeff Chapman, an economist at the Economic Policy Institute, a Washington, D.C., think tank focusing on the economic condition of low- and middle-income Americans.
He adds that opponents of minimum-wage increases typically concentrate excessively on small businesses for the same reason "people talking about government-support programs focus on children." Says Mr. Chapman: "Small businesses are an easy sell to the American public. That's the reason for the focus."