Back in 1996, when then-President Bill Clinton was arguing for an increase to the federal minimum wage, his chief of staff laughed off complaints from business owners with minimum wage employees: “We’re talking about a lousy 90 cent increase,” he scoffed.
You can imagine his incredulous response to the 10-cent increase in Montana’s minimum wage occurring on Jan. 1: “It’s just a lousy 10 cents!”
This dismissive attitude betrays ignorance of the way business works. Understanding the economics faced by employers helps explain why the state’s businesses are concerned about the wage increase – even if it’s just over a dime an hour.
What does 10 cents an hour actually entail? Consider a grocery store that averages 10 employees earning the minimum wage on the clock at any given time. If this grocery store is open 15 hours a day, 365 days a year, then paying these employees an extra 10 cents an hour (with payroll taxes included) means paying out nearly $5,500 extra per year. (It could be even higher if employees further up the wage scale also demand a raise.)
That’s no small amount, especially for a small business. And since businesses with a staff of less than 100 people employ nearly half of people who work at the minimum wage, the effects of a wage increase on these entrepreneurs on the margin can’t be ignored.
But there’s an even steeper hill for that store owner to climb. Profit margins in grocery stores are tiny – often as little as 2 percent. To generate $5,500 in profit, for instance, the store has to move $275,000 of pasta, milk and chicken breasts.
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Now we have to ask some tough questions. Can our grocery store more easily raise prices, sell extra merchandise, or trim labor costs by cutting back employee hours and laying people off? Given customer sensitivity to prices and the inability to simply force consumers to eat four meals a day, the only thing left on the chopping block is labor costs.
If Montana businesses hope to maintain the few cents in profit per sales dollar spent, they have to make a series of difficult choices when faced with rising labor costs. Sometimes they’ll cut costs by introducing self-service (e.g., bagging your own groceries at the grocery store or bussing your own table at a fast food restaurant); other times, they’ll decrease customer services. Witness Chili’s recent move toward tabletop computers that customers can place their orders on, or McDonald’s decision to test iPhone apps that let customers order and pay without ever talking to a cashier. Either way, it eventually means fewer jobs.
Advocates for a higher minimum wage typically dismiss these cold economic arguments in favor of rhetorical options. Witness the recent fast food strikes, where protestors contrasted the earnings of company CEOs with those of a minimum wage employee.
But even this is a poor argument for raising wages – it’s more of a public relations gimmick that has no basis in economic reality. Even if you slashed to zero the salary and bonus of the CEOs of the country’s largest service-sector employers, the hourly staff would receive a raise of one cent an hour or less.
These arguments and others like them simply don’t stack up against the economic realities that small businesses face. In Montana, it may just be a “lousy” 10 cents for some well-meaning activists. But to business owners in labor-intensive industries, 10 cents could be the difference between having 10 people on a shift or nine. As for the person who loses out on that shift, 10 cents might be the difference between having a paycheck or joining the millions who used to have jobs.
Michael Saltsman is a research fellow at the Employment Policies Institute.