In an effort to improve living standards in Los Angeles Mayor Garcetti has proposed a plan, known as Raise the Wage, which will attempt to reduce the population living in poverty. This goal would be reached in two steps. The first step in Garcetti’s plan is to raise minimum wage every year or so until a $13.25 minimum wage is reached in 2017. Secondly, once this target wage is in place, minimum wage will be calculated based in the Consumer Price Index. But how will this wage increase affect small businesses?
Research conducted by UC Berkeley suggests that this increase will not have much of a negative effect, but I disagree. During the past few years many small businesses have been operating at small margins and fighting to survive. A proposal such as this may force many entrepreneurs to reduce staff due to not having enough resources to keep up with the wage hikes and increased payroll taxes and workers compensation insurance which are based on total payroll. Businesses that maintain staff levels required to operate will most likely have no choice but to increase prices to account for higher payroll expenses. This in turn may decrease sales. It’s a basic economic rule: if prices go up, demand for goods and services decreases.
Let’s look at a restaurant as an example. An increase from the current minimum wage of $9.00 to $13.25 is a 48% increase (and doesn’t take into consideration the additional payroll expenses), so meal costs may increase up to 50%. Most consumers are price sensitive and not willing to pay $15 for a meal that used to cost $10 and as a result some restaurants could go out of business which will in turn harm local economy.
UC Berkeley’s research concludes that higher wages will mean more productivity and less worker turnover which in turn will result in lower recruiting and training costs. This sounds great, however, when one works out the math, worker productivity would have to increase significantly in order for businesses to absorb this cost. This claim of being able to absorb this increase assumes that employees are only productive for 4 hours of an 8 hour work day. Even if employees don’t work to their full potential at a lower wage, and with a higher wage may work a bit harder, I find it hard to believe that an employee at minimum wage is so inefficient that they’ll suddenly be giving a full 8 hour work day when their wage is raised.
There is another question that must be answered. What will happen when minimum wage closes in on or surpasses wages of higher-end workers? According to the Berkley study, out of the 10 million people who make up Los Angeles only 576,000 will be eligible for a wage increase. Currently these workers are earning a median of $16,000. But they fail to consider that business owners may have to increase the wage of employees not eligible for an increase due to earning more than the minimum wage. More senior employees or those with higher job skills are going to expect to be paid more than entry level minimum wage earners.
It may sound like I’m against raising the minimum wage, but in actuality I’m not. When I was young, I struggled just like most everyone else, and the minimum wage was less than half of what it is now! Of course I would have loved to have earned more so it was easier to cover my expenses. I have children who are about to head out into the world and have to support themselves. I’d like them to earn more so they can afford to pay their rent, utilities, and other expenses. But if a significant wage increase reduces the number of jobs available, it will be even more difficult for them to find employment at all. No employment is less income than a lower minimum wage.
One final thought…increasing the wage of a person doesn’t guarantee they won’t still be living in poverty. Workers need to be educated on budgeting, saving for their future, and money management. We’ve all heard stories of lottery winners ending up worse off and in more debt than before they won the money. It’s not how much money someone earns, but how well they manage it that will determine their wealth.
Click here to read UC Berkeley’s study: The Mayor of Los Angeles’ Proposed City Minimum Wage Policy: A Prospective Impact Study
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