Riddell: The costs of raising the minimum wage
October 4, 2016
With today’s almost overwhelming sensitivity to anything even approaching non political correctness, so many business managers and leaders shrink from engaging their workforce regarding political outcomes. While labor unions are never hesitant to direct their members on recommended voting positions, small business managers seldom engage their employees in such discussions. Yet the voting outcome and subsequent impact for these small business employees is probably significantly more personal and impactful in the short run.
Consider for a second the pending argument and justifications regarding an increase in the minimum wage. Please forget for a moment the altruistic living wage debate. The minimum wage was never intended to be the basis for the primary wage earner to support his or her family at a level of relative comfort. Rather, it has always been the entry pay gate for those entering the labor market, a gate where additional skills and their inherent value rapidly advanced their owner past the initial entry level. It should also be noted here that many national union contracts are tied to the minimum wage. Any increase in the minimum wage results in a mandatory increase to the union wages. I’m not saying that there is anything wrong with this negotiated clause, just that some of the rhetoric calling for an increase in the minimum wage may well not be just to help the working poor.
So consider for a moment a typical service business here in Grand County where the current minimum wage is the entry standard. An increase in this wage is an increase in labor costs. Any increase in labor costs requires the business owner/manager to pursue one of three very basic courses of action. The first is to absorb the increase in individual labor costs by simply reducing the number of individual laborers and/or investing in productivity enhancing technology. This means someone gets fired and now the previous minimum wage goes to no wage. The second option is to raise prices to the customer to offset the labor cost increase. This price increase may or may not be accepted by the customers. In addition, this also assumes that all of the competitors also raise their prices equally. In very competitive environments such as fast food, this can be a very dangerous and erroneous assumption. The third option is a combination of the first two. Perhaps no one gets fired but individual working hours are reduced and small price increases are passed on to the customer with a close eye on any impact on volume.
The point here is not to present a case for or against an increase in the minimum wage. Rather, it is to simply point out that every political decision carries with it unforeseen consequences. For those not directly connected with the operation of a small business, it is easily understood how some of these unforeseen consequences may not even be on their individual radar screens. But I assure you, these are on the radar screens of the small business owners and managers. Unfortunately, the vast majority of small businesses, especially labor intensive service businesses, have very little cushion to absorb any negative consequence. The request here is to certainly vote your preference, but please do it with your eyes open.
Following a successful international business career, John Riddell turned his attention to small business/entrepreneurial pursuits that included corporate turn-arounds, start-ups, teaching, authoring business and sports columns and serving as VP for the Chattanooga Chamber of Commerce directing its Center for Entrepreneurial Growth.