Argumentative Research Paper: The Effect of Will the Minimum Wage on Business

The Impact of Minimum Wage on Employment

The term “minimum wage” applies to the constitutionally permissible price limit set for hourly wages (Abbott 22). Non-exempt employers can not agree or be granted jobs if their salary is less than this level. The minimum wage in the United States is set by US employment law, as well as a system of federal and local laws. A business owner is required to pay their employees the highest minimum wage allowed by federal, state, and local legislation. Rates of minimum wage rates vary widely in different countries, not just in specifying the pay, for example, $7.25 an hour under specific American state legislation (or $2.13 for the tipped minimum wage), or $9.47 in Washington (Belman and Wolfson 12). In January 2017, nineteen American states increased their respective minimum wages, Washington being one of the most generous with a raise of $1.53 to bring it to a total of $11 per hour. The minimum rate in Arizona now sits at $10 after getting an increase of $ 1.95 (Chhabra). In total, more than four million workers were scheduled to receive a raise as they earned far less than the designated minimum wages in their states (Garrett). Based on the perennial fallouts from the recommended salaries, hikes often turn out into wait and see situations, with employers hardly managing to meet the threshold (Neumark and Wascher 33).

The Rise in Operational Costs

The result of increasing the minimum wage is always a rise in operational costs. According to Garrett, in February 2017, Bob Wright, the CEO of Wendy’s projected a 4 percent increase in the company’s wage bill. To counterbalance the rise, Wright quoted some options including cutting margins, increasing the prices of their products, or reducing their labor force. After an intense evaluation process, the management settled on the latter, eliminating a total of 31 hours of labor per week, for every location. However, this did not deter the number of customers walking through their doors at any given time. In a bid to maintain the organization’s output levels, the management planned to install automated booths in 16 percent of their outlets by December 2017 (Worstall 1). Thanks to labor savings, the management affirms that the payback timeframe would be less than two years.

Automation in the Service Industry

The fast-food giant, McDonald’s, has also been gradually moving towards automation. In November 2016, the organization announced their intention to have each of its 14,000 US outlets replace cashiers with automated stalls (Ross, Ressia, and Sander 128). The management prioritized this move in the branches located in countries where the minimum wages are higher, including New York and Seattle. The restaurant business is the canary in the coal mine in issues of raising the minimum wage. In 2016, close to 70 percent of the employees taking home minimum wage worked in the service industry, mainly in food preparation.

The Escalating Labor Costs for Restaurants

On average, restaurants are currently spending a third of their earnings on labor. The escalating labor costs lead to plummeted margins. In September 2016, 25 percent of closed restaurants in the California Bay Area cited unbearable costs of work as their primary reason for closure (Worstall). With warning signs blazing for the restaurant sector, increasing the minimum wage means increasing the threat for the rest of the economy.

The Impact on Low-Skilled Employment

When assenting to a bill charged with ensuring that California’s minimum wage rises to $15/hour by 2022, the Governor, Jerry Brown, was quick to state that while minimum wage did not make economic sense, it was socially and politically right to enforce them (Chhabra). Hikes lead to increased labor costs. Eventually, some jobs are priced out of existence, pushing lots of workers out of employment. Unfortunately, the population that suffers is the young low-skilled group, consisting of the people that such regulations are meant to protect.

The Rise of Automation and Job Replacement

Studies have proven that increasing minimum wage lowers low-skilled employment. As such, escalating costs of labor eliminate their competitive advantage thus rendering them unemployable. As discussed earlier, businesses are continually replacing them with machines. In 2013, the University of Oxford carried out a study which established that in the next two decades, close to 50 percent of all jobs in the United States would likely be automated (Belman and Wolfson 38). McKinsey’s 2017 report looking at the ability to replace human labor with automation came to a similar conclusion. Based on its findings, 59 percent of all manufacturing tasks could be done using technology and doing away with human workers, with the most affected industry being food service where 73% could be automated (Chbbra 2). Nonetheless, this is caused by the proliferation of advanced technology, which raises the marginal rate of technical substitution for low skilled labor.

The Pros and Cons of Increasing Minimum Wage

Experts and organizations alike have delved into the topic of minimum wage, coming up with potential strengths and weaknesses of raising minimum wage on the economy, and businesses. However, this has resulted in many rational opinions, with probably not any foreseeable consensus path. The United States Department of Labor (DOL) reviewed 64 studies linked to the subject at hand, finding no evident effect on the employment. Also, this was unlike other studies which concluded that minimum wage directly impacted employment levels. In June 2014, a nationwide survey established that three in every five small business owners were in support of minimum wage increment. The respondents believed that higher minimum wage benefits businesses in various meaningful ways. 58 percent said that if workers received more earnings, this would increase their purchasing power, therefore, positively impacting some sales made by the companies. A further 56 percent were of the opinion that the move would help the economy, thereby providing a suitable environment for doing business, while 53 percent said that increased wages would result in improved employee satisfaction (Abbott 58). More so, this would benefit businesses by reducing employee turnover, raising productivity levels, and ultimately customer satisfaction. The small companies with members of staff earning more than the minimum wage agreed that their operations would not be negatively impacted by the increases. The business owners go on to affirm the statement that increased income would benefit their businesses due to the spiked consumer purchasing power resulting from the additional cash available to the families (Fang and Liny 22). Despite the fact that top business leaders want their workers to earn decent wages and live a decent life, the issue of minimum wages has an adverse effect on their business operations.

The Negative Effects of Raising Minimum Wage on Business

In spite of the benefits and advantages proposed by the various industry players, raising the minimum wage has negative effects on businesses. While the authorities may have positive intentions in raising the minimum wage, many companies, especially the small ones, face the risk of closure from the harmful effects of the move. The Employment Policies Institute, a nonprofit, started a campaign website to gather views of business owners. Dubbed “Faces of $15,” the plight of small businesspeople in the United States as they struggle to keep up with the increases is highlighted (Garrett). The site contains stories of those affected by the growing costs telling of how they have been forced to close shop, while another more significant percentage has lost employees. Experts affirm that policymakers must look beyond the face value of the wage mandate.

The Importance of Small Businesses

Since the 1970s, small businesses have provided the economy with 55 percent of all jobs, while 66 percent of all new jobs are found in this segment. With 28 million small enterprises accounting for 54 percent of the total sales in the United States, they cannot afford to be ignored. Besides, 600,000 franchises are in this category, accounting for more than 8 million job opportunities. Adding this to the real estate sector, small ventures occupy 20-30 billion square feet of commercial space (Leonard 117). According to the EPI, it is not difficult for large corporations to adopt $15 minimum wage. However, it is an extreme hill task for the small businesses constituting the backbone of the American economy (Garrett).

The Impact on Small Business

Suzie Ford, an entrepreneur, and co-owner of NoDa Brewing Company in North Carolina believes that it is critical to pay her workers decent wages. The firm, whose core business includes brewing pales ales, porters, and IPAs has more than 40 employees and an annual turnover of $6 million. The workers in the organization make more than the federal minimum wage of $7.25-per-hour, with more than 50 percent earning more than $15 an hour. However, the national debate regarding raising the minimum wage to a minimum of $15 does not augur well with this business owner. She appreciates the need for workers to earn a respectable salary, though estimates that an increase across-the-board would cost the firm about $40,000 every year (Chbbra 2). Nonetheless, this move will significantly reduce the ability to hire more employees for her and other organizations, a fact that may affect productivity and business growth.

The Debate Continues

The pro-supply economists such as Thomas Leonard of Princeton view the minimum wage issue as an unnecessary regulation of small business by the government since the skill levels of employees together with market forces determine their wages. On the flipside, pro-demand economists regard it a means through which unskilled workers can be lifted out of poverty. Examples of pro-demand economists are David Card and Alan Kreuger (Abbott 132). While the latter may be true, economists also agree that of all the business operational costs, salaries and wages take the most prominent portion, in addition to being one of the controllable expenses. Therefore, when a government places a mandate dictating that small business owners must pay more to their employees, the total wages must rise reasonably since the experienced and skilled workers also become more valuable. Accordingly, small businesses are impelled to scale back their workforce, initiate freezes on recruitment, or cut employee working hours and benefits. By extension, raising minimum wage also pushes smaller entrepreneurship to shift operating capital from expansion and inventory (Leonard 67).

The Challenges for Small Businesses

The smaller businesses unable to adopt the increased wages often have two options: reduction of their workforce or passing the increased costs on to their consumers. While reducing workforce has been discussed earlier as being a cause of reduced output, the latter inflates the pricing of goods and services offered by the businesses. Furthermore, this has a negative effect on their market since a price increase always leads to reduced sales (Belman, Dale, and Wolfson 37). Some city restaurants have reacted by adding a surcharge of between 3 and 4 percent to recompense a portion of the increasing costs resulting from labor-related expenses. Based on a Wall Street Journal article, the increased menu prices led consumers to opt for less expensive foods that they would not usually have before the hikes (Jargon). The surcharge aids in mitigating the escalated operating costs, though the success of the move remains in question. A decrease in sales levels results in fewer revenues, margins, and eventually, profitability, which could cause business closure. A survey by the National retail federation established that 37% of the small-sized retailers would encounter grave threats in their ability to continue their operations under a minimum level of $15 for every hour worked (Ross, Ressia, and Sander 35).

The Ripple Effect on the Economy

According to Leonard (118), while a majority of small employers only foresee job losses due to escalating operating costs, there arises further threat. However, this stems from upward pressure exerted on organizations forcing a pay increment for all employees. To offset the rising costs, the company would be required to increase the overall pricing of their commodities. The decreased sales and revenues would be the result of hiked prices, and coupled with raised minimum wages, would cost the economy half a million jobs. Of this newly jobless population, the majority are left without a means through which to acquire goods and services in the market. As a result, businesses experience a decrease in the level of products being purchased by consumers. Should business owners decide to absorb the dropping consumer demand by increasing costs of goods and services, this would further erode the average consumer purchasing power. In the end, consumers would be unable to buy. As stated, a decrease in sales levels results in fewer revenues, margins, and eventually profitability, which could cause business closure.

Conclusion

Few bills are known to hit business owners’ pocketbooks harder than the salaries paid to their employees. Theoretically, increasing the minimum wage should result in more finances in the workers’ accounts. However, in spite of this fact, the primary criticism of the laws on minimum wage is the fact that it would be detrimental to businesses, particularly the smaller, privately-owned ventures. Should the United States choose to eliminate the minimum wage in totality, then fees could be determined by the forces of supply and demand. The employers experiencing difficulty in retaining their staff may have the option of paying more wages or offering better benefits, with the interaction between employers and their employees setting a market rate of pay. Furthermore, this diminishes the need to interfere with a price policy that can be fixed by supply and demand. Besides, other careers have their compensation determined by market rates. With the minimum-wage workforce constituting a paltry 3.3 percent of the entire hourly paid population of workers (US Bureau of Labor Statistics), it may seem as if additional efforts are spent on discussing an issue that only impacts a small group of employees (U.S. Bureau of Labor Statistics). With this fact and the matters presented depicting the negative impact of the minimum wage on business, the report concludes by stating that setting the minimum wage is a bad idea that should not have a place in the economy.

Works Cited

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