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BFS Capital Blog

How Will a Minimum Wage Increase Impact Small Businesses?

January 25, 2016

Like it or not, the minimum wage is going up.

What promises to be a major issue in the 2016 presidential campaign has already been a hot topic among local governments over the past year. And while the Federal Minimum Wage hasn’t shot up too dramatically – still $7.25 an hour – it’s significantly higher in 29 states, many large cities, and the District of Columbia.

This disparity and the looming minimum wage increase may have a big impact on your small business.

Where Is Minimum Wage Going Up?

First thing’s first: When you read about a state or city raising its minimum wage to $15 an hour, that doesn’t mean the kid you were paying $7.50 is getting his salary doubled immediately. These measures are most often phased in over years, so you have time to adapt your business model.

And the Federal Minimum Wage is just a floor set by the government, local and state governments can still set it higher if they choose.

On January 1st of this year, ten states raised their minimum wages: Alaska ($9.75), Arkansas ($8.50), California ($10), Connecticut ($10.10), Hawaii ($9.25), Maryland ($8.75), Michigan ($8.90), Nebraska ($9), Rhode Island ($9.60) and Vermont ($9.60). Other states – like South Dakota and Colorado – tie their minimum wages to cost of living, and had small increases as well.

Some major cities have seen drastic minimum wage hikes. Seattle, San Francisco and Los Angeles all have passed laws to have minimum wages at or above $15 an hour by 2021. New York City and Washington DC also have proposals for a $15 minimum wage in the works. Meanwhile, Chicago will have a $13 minimum wage by 2019, and Oakland begins at $12.25 this year.

Getting ahead of the curve, major employers like Target, McDonald’s and Facebook have all announced they’d raise wages, regardless of what measures are passed. But the major question remains: Is any of this good for small business?

Don’t Panic About the Minimum Wage Increase … Yet

To understand what kind of effect increases will have, you must first look at why people want to raise the minimum wage. It was established to provide a living wage for workers, but since the 1970s, the rate of inflation has outpaced the Federal Minimum Wage increase. This has led to the recent movement to bring the wage back to the level it was in about 1969, the last time it was also considered a “living wage.” That’s defined by the Fair Labor Standards Act as the “minimum standard of living necessary for health, efficiency, and general well-being.”

The $15 an hour figure favored by those promoting the minimum wage increase calculates to an annual salary at twice the poverty level, essentially a “living wage.”

But an increase like this is unprecedented, and as a July article from the New York Timesdemonstrated, even top economists aren’t sure what’s going to happen should a wage hike this large be enacted.

“There could be quite large shares of workers affected, and research doesn’t have a lot to say about that,” said former White House economist Jared Bernstein in the article. “We can’t assume that because the proposal is out of sample it’s going to blow up. But we have to be less certain about the outcome.”

And studies show different results. An oft-cited report from the Congressional Budget Office estimates that a minimum wage increase could lead to a reduction of 500,000 jobs. This is because smaller firms – like yours – would likely react to the increased labor cost by cutting their workforce. Correspondingly, a study from the University of Georgia found “a 10 percent increase in the minimum wage is associated with a 0.9 to 1.1 percent decline in retail employment and a 0.8 to 1.2 percent reduction in small business employment.”

But don’t start sharpening your firing axe just yet. There is no consensus on the overall economic impact, and your business might not be as affected as you think.

Which Businesses Will Feel It, and How Do I Respond

Many small businesses won’t really feel the minimum wage increase. Small businesses in expensive, large cities for example, often don’t see labor as such of an expense as, say, rent. So an extra $1 an hour to their employees won’t be as dramatic on the balance sheet as it might be in a place where rent is cheaper.

Similarly, a survey from American Express showed that 75% of small businesses don’t even employ minimum wage workers. So while those in retail businesses and restaurants might feel impact, small businesses in fields like technology, constructionauto repairbeauty salons/spas and professional services already pay well above minimum wage, and likely won’t have to increase labor cost.

The only real historical precedent we can look at is in Seattle, the first major city to enact a sizable minimum wage hike. And during 2014, unemployment in greater Seattle actually decreased, from 6.3% to 5.2%. But again, other factors could have influenced those numbers, so it’s not a large enough sample.

If you do find yourself in an industry that’s immediately affected by the hike, there are a number of things you can do. And not all of them involve laying people off:

  • Many restaurants have done away with tipping and instituted “service charges” to be split among front-and-back-of-the-house staff. A short notice to customers than an additional 3-5% tip helps servers maintain their current income often offsets the disparity.
  • More money means a higher quality of employee. So as you hire new employees, up your standards to coincide with the money you’re paying. You may find you need fewer employees. And as people leave your firm, you may cut secondary roles by attrition.
  • Cross-training your employees means that if you do have to lay people off, you won’t find yourself short staffed. If a minimum wage increase is imminent, start this process sooner rather than later.

We wish we could tell you that a minimum wage increase wouldn’t hurt your business. Or give you tips to mitigate the ensuing fallout. But with an unprecedented economic move like this, there are no definitive answers. If you do find yourself strapped for cash with increased labor costs, BFS Capital can offer you a quick funding solution so your business doesn’t miss a beat.