MONEY

The Minimum Wage Hike (Likely) Cometh, But Destruction Isn't Certain

The CBO's report on the minimum wage gave both liberals and conservatives valuable ammunition. But small businesses could pay the price.
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In addition to being a real eye-opener, the recent Congressional Budget Office report on raising the minimum wage had something for everyone.

If you oppose a hike to the federal minimum wage, you'll find plenty to support the idea that wage increases will only add to your labor expenses and probably lead to job cuts. Advocates of higher wages will, conversely, find assurance that a minimum wage increase will benefit the broader economy and business owners.

Essentially the decision to raise the minimum wage comes down to whose side you favor on income redistribution, which is happening whether you like it or not.

"Most [low-wage workers] would receive higher pay that would increase their family's income, and some of those families would see their income rise above the federal poverty threshold," the CBO says in its report. "But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly."

More specifically, raising the minimum wage to $10.10 from its current $7.25 an hour, a 39 percent increase, would lift close to one million workers out of poverty, according to the CBO's report. Doing so, however, might cost the economy about 500,000 jobs, or 0.3 percent of the workforce, by 2016. (An increase to $9, which some politicians have proposed as a first step, would cost the economy 100,000 jobs, the CBO says.)

An increase would affect 16.5 million workers, adding $5 billion in real income to families whose income is currently below the poverty threshold, and $12 billion to families whose income is currently between one and three time poverty level. Those expected to lose jobs would be disproportionately teenage workers, who earn the least, the CBO says.


Conservative groups like the National Center for the Middle Market, which works in partnership with Ohio State University and GE Capital, are urging caution over raising wages. The group argues that middle market companies will disproportionately feel the minimum wage increase, because most policy changes include a carve out for the smallest businesses.

Similar carve outs exist for small business owners in states or municipalities that have raised their minimum wage above the federal rate. For example, SeaTac, a suburb near Seattle's main airport, exempts the smallest businesses from paying the $15 hourly minimum approved there last year.

NCMM says a minimum wage increase will curtail growth as companies put off hiring workers to stay under federal thresholds that require the federal minimum wage.

Currently, certain kinds of small businesses are exempt from paying employees the federal minimum wage, such as businesses with annual revenues less than $500,000, companies that transact within a single state, seasonal businesses, or companies that rely on contract workers. 

"Even if the current minimum wage increase proposals don't affect your company, it sets a bad precedent," Merrill Matthews a resident scholar at the Institute for Policy Innovation in Dallas wrote in a recent article for NCMM. "A government that feels justified in raising the minimum wage high enough to hurt some companies may soon feel justified in raising it high enough to affect your company."

Non-partisan groups such as the Brookings Institution argue that raising the minimum wage is not a punitive exercise, but a necessary one that broadens the base of consumers who can participate in the economy.

The current minimum wage is lower than it has been in terms of purchasing power for every year between 1956 and 1983, according to Brookings. The minimum wage today is less than 40 percent of the average wage, compared to more than 50 percent in 1968.

"Even using opponents' estimates of the adverse employment effects of a minimum-wage hike, low income workers as a whole end up considerably better off after the minimum wage is raised," Gary Burtless, a Brookings fellow wrote in a blog post from December. "That is because the weekly earnings gains enjoyed by low-wage workers who remain employed is considerably bigger than the weekly earnings lost as a result of lower employment."

Some increases to the minimum wage are already under way. In his January State of the Union address, President Obama, a proponent of a higher minimum wage, announced he would increase wages for federal contract workers to $10.10. About 20 percent of employees working for private federal contractors earn poverty wages, according to the left-leaning Economic Policy Institute.

And it's the poor who need income redistribution most now, EPI says. For the past thirty years or more, the top one percent of earners have received more than half of all income increases. By contrast, the bottom 99 percent of earners have taken home less than 19 percent of income increases.

"At a time when persistent high unemployment is putting enormous downward pressure on wages, such a minimum-wage increase would provide a much-needed boost to the earnings of low-wage workers," EPI noted in a joint letter addressed to House and Senate leadership. That letter supporting a higher wage was signed by several hundred economists and a Nobel Laureate in January.

IMAGES: Gallery Stock, Congressional Budget Office
Last updated: Feb 19, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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