Minimum Wage: What’s the right number?
22 states raised their minimum wage this year — what’s the impact on business owners?
(This column originally appeared in The Washington Times)
This month, California’s minimum wage for fast-food workers will increase from $16 to $20 per hour. The governor of my home state of Pennsylvania has proposed increasing our minimum wage from $7.25 to $15 per hour.
This year, 22 states raised their minimum wage, with seven more states (Delaware, Florida, Hawaii, Illinois, Nebraska, Rhode Island and Virginia) having passed legislation or ballot measures to raise their minimum wages to as high as $15 an hour in the coming years.
In 2019, the House passed a bill to raise the minimum wage to $15 per hour nationally over a six-year period, but that legislation failed in the Senate. Many in Congress don’t support a national minimum wage, preferring instead to let the markets do their thing. They’ve got a point.
Hourly wages increased a whopping 15% in just the past three years, with the average hourly wage now reaching about $35 per hour, which is almost five times the $7.25 federal minimum wage that is still the standard in 20 states. Although my state’s minimum wage remains at the federal level, I don’t know of a single business that pays this wage. Even the swimming pool in my township pays its lifeguards more. Most of my clients pay their entry-level workers as much as two to three times this amount.
Many legislators — including Sen. Rand Paul, Kentucky Republican — feel strongly that constituents in their home state shouldn’t be forced to pay the same wage as their counterparts in other locations where the cost of living is higher.
“I think only the marketplace can determine what is the proper wage, and wages are different, whether you live in New York City, or Birmingham, or Lake Jackson, Texas,” he told me. “It depends on the size of the city, where you’re located, and wages are what the market will bear.”
Each time a state or the federal government proposes an increase in the minimum wage, business owners howl. They say an increase will drive up their costs and force them to cut jobs. Are they right? It depends on whom you ask.
According to studies from Purdue University, the Evans School of Public Policy & Governance at the University of Washington, and even the Congressional Budget Office, businesses do indeed reduce their number of employees in response to a minimum wage increase. But then there are the studies from the Quarterly Journal of Economics, the National Bureau of Economic Research, and (gasp) the University of California, Berkeley, which have all found that an increase in the minimum wage has little to no impact on employment and hiring. So what’s the answer? It depends.
One thing is for sure: It’s generally not catastrophic. Even when a business is in New York City or Tukwila, Washington (which has the highest minimum wage in the United States, at $20.29 per hour for large employers and $18.29 for midsize ones), they adapt. To these business owners, it’s just another increase in costs, and they respond in kind.
How do they respond? Many raise prices. Others cut overhead or limit hours. Those with the means invest in technology to do some of the work that employees once did. This is why we’ve seen a proliferation of machines and robots from companies such as Miso Robotics, Bear Robotics and Connected Robotics. The robots flip burgers, clear tables and wash dishes. Yes, businesses mostly adapt when minimum wages go up. But there’s a limit to what any employer can afford.
If California raised its minimum wage to $100 per hour, then many businesses would obviously suffer and even shut their doors. But if the state raised its minimum wage by $1, it would have less effect and would likely be absorbed by most. Is $20 per hour too high? Probably not.
I expect fast-food store owners and franchisees in that state to grumble. Still, they’ll figure out how to pay the wage without cutting back too much on hiring or raising their prices too much (already a number of franchise food operators in California have announced that very thing). They won’t be happy, but they’ll stay in business.
Is an increase in the minimum wage good for society? Will it reduce turnover? Increase job satisfaction? Does it benefit minority workers more than others? Will it create more spending thanks to higher disposable income? Depending on the election cycle, politicians who support an increase will use all these theories while others will push back. As you can see above, there are academic research conflicts.
Do I, as a small-business owner, support increasing the federal minimum wage? I’m more on Rand Paul’s team, because this country is too big and diverse to impose such a cost requirement on all businesses.
But make no mistake: The federal minimum wage of $7.25 per hour is going to be raised at some point. Whether or not that’s a good idea can be debated forever.
But something is missing, and it’s what’s more important to me and most of the business owners I know: the right number. Will it be $15 per hour, or $100 per hour? It seems like the number gets pulled out of the air without much thought or analysis, depending on the political winds. It shouldn’t be arbitrary, considering what’s at stake.
