MANY OF THE NATION’S small-business owners are about to see their labor costs rise, but that’s not entirely a bad thing.
Thanks to a three-tiered federal minimum wage-hike that Congress approved two years ago, starting Friday employers are required to pay hourly workers at least $7.25 per hour. This third and final rate hike – the last in a three-stage process – represents a 70-cent jump from $6.55 per hour. (Last year, the minimum rose 70 cents from $5.85.)
The change is unlikely to come as much of a shock. Businesses have been anticipating it for months and have been making changes to better afford paying out higher wages. And not every employer in every state will be affected by the new minimum. (Nineteen states, plus Washington, D.C., already mandate hourly wages of $7.25 or higher.)
However, retailers and fast food restaurants in 31 states including Florida, Pennsylvania and New Jersey will be required to give millions of workers a raise, amounting to $1.6 billion a year, according to the Economic Policy Institute, a nonpartisan think tank in Washington, D.C. In addition, many struggling small-business owners worry that such a move may set them over the edge.
“For small firms, labor [already] accounts for 80% of their costs,” says Bill Dunkelberg, the chief economist for the National Federation of Independent Businesses, an advocacy group in Washington. “For them, if the minimum wage goes up by a buck, their bottom lines go from $50,000 to $30,000.”
While there’s no doubt some small companies will need to raise prices, lay off workers or even close their doors because of added labor costs, some economists argue that higher wages could spur operational improvements and even boost sales.
Here’s the good news and the bad news for small-business owners facing a new higher minimum wage:
The Good News
Studies show that employee morale tends to improve with higher wages, says Mark A. Price, a labor economist at the Keystone Research Center, a think tank in Harrisburg, Pa. “When people feel better about their jobs, they tend to work harder,” he says.
Business owners might also try organizing their businesses to run more efficiently, Price says. In addition to streamlining their operations to get more out of their existing staff, companies might implement time-saving technologies and better supply-chain management techniques, he says.
Finally, paying lower-wage workers more could actually spur small-business sales, says Dean Baker, a co-director at the nonpartisan Center for Economic and Policy Research in Washington, D.C. “Putting more money in workers’ pockets, could lead to an uptick in demand,” he says. “They’re going to spend it, not invest it.”
The Bad News
Businesses will be paying higher labor costs. And if they can’t afford to lose any more profits, they may raise prices to recover those costs, says Dunkelberg from the NFIB. “When prices are higher, people will buy less,” he says. And although big-box discounters like Wal-Mart Stores (WMT) and Target (TGT) face the same wage hikes as smaller firms, they’re likely to raise prices only modestly, as they’re able to spread price increases thinly over a wider range of product offerings than small businesses. If small firms, which already tend to charge higher prices than giant retailers, hike prices, they could wind up with even fewer sales, as penny-pinching consumers flock to big discounters, he says.