Earlier this year, the 2013 Fair Minimum Wage Act, an initiative of President Obama, proposed raising the federal minimum wage from $7.25 to $10.10 by July 1, 2016.
The newly proposed wage increase is raising concerns among Colorado business owners, despite many economists’ reassurance that it will benefit the nation as a whole.
The minimum wage has been a hot-button topic since President Franklin D. Roosevelt’s 1938 Fair Labor Standards Act established a minimum wage starting at 25 cents per hour. In the 76 years since then, Congress has raised it nine times. The federal minimum wage now sits at $7.25 per hour, or $2.13 per hour for tipped employees.
“The reality is that a minimum-wage increase would inevitably result in price increases for most businesses to afford the increased costs,” said McCabe Callahan, founder of Mugs Coffee Lounge in Fort Collins. “So if people are making more and having to pay more, it kind of offsets. While I want to pay my employees more money, the reality is that increase would result in a pretty significant increase in my costs as a business and I would have to raise the prices to my customer.”
Callahan said he has 25 employees working at the two Mugs locations and that all employees are paid higher than the minimum wage after they complete training.
For a business that has 25 part-time employees working 20 hours per week at the $8 Colorado minimum wage, the business owner is paying $208,000 per year in wages. Bumped up to $10.10 an hour, the business owner would pay $262,600, an increase of $54,600.
The minimum wage in Colorado is higher than the federal standard, and is determined using a Consumer Price Index model. In Colorado, minimum wage goes up each year according to inflation, under a constitutional amendment approved by voters in 2006. Colorado is one of 12 states to tie its minimum wage to the cost of living. The most recent increase occurred Jan. 1, when the minimum wage was raised from $7.78 to $8 per hour. The minimum wage for tipped workers is $4.98, compared with the national $2.13 rate that has been in effect since 1991.
Although concerns have been raised by some business owners, economists evaluating the effect of an increased minimum wage nationwide have documented positive economic growth as a result.
“Raising the minimum wage to $10.10 will raise wages for roughly 28 million workers, giving them roughly $35 billion in wages,” said economic analyst David Cooper with the Washington, D.C.-based Economic Policy Institute, a nonprofit, nonpartisan think tank. “Additionally, it will lead to a net increase of about $22 million in GDP (Gross Domestic Product). Additional wages are important during a time when consumer spending is depressed; transferring income to low-wage workers can have a stimulating effect on the economy.”
In a briefing paper he co-authored in March 2013, Cooper analyzed where wage rates would fall if they kept pace with the rest of the workforce.
“If the minimum wage had kept pace with the average wages – i.e., if minimum-wage workers’ paychecks had expanded at the same rate as average workers’ – it would be about $10.50 today. If the minimum wage had kept pace with the economy – the economy’s overall capacity to generate income – it would be almost $18.75 today. Finally, if the minimum wage had increased at the same rate as wages of the top 1 percent, it would be over $28 per hour.”
Still, job loss is a major concern among many organizations. The Congressional Budget Office published a report in February stating that an increase to $10.10 would cost 500,000 workers their jobs, or 0.3 percent of the total workforce. However, the increase would generate an additional $16.5 million across workers who would retain their positions. To offset job losses, the CBO suggests a $9 minimum wage as a more viable option.
Economists counter the CBO argument with the notion that higher wages mean more economic activity, which ultimately results in the generation of new jobs. In fact, the Economic Policy Institute estimates an additional 140,000 jobs would be created if the Fair Minimum Wage Act is approved.
“The number of job losses the CBO is predicting is just a midpoint on a wide range of estimates,” said Steven Shulman, chair of the economics department at Colorado State University. “There’s always going to be different research models, However, there are many estimates that conclude there is minimal impact on employment” when the minimum wage is increased.
The hallmark study on this question was published in the 1994 American Economic Review. The authors examined more than 400 fast-food restaurants on both sides of the New Jersey-Pennsylvania border after New Jersey raised its minimum wage in 1992, while Pennsylvania’s minimum wage held constant. In telephone surveys conducted before and after New Jersey’s minimum-wage increase, the authors found no evidence that it led to job loss, and instead that employment increased in fast-food restaurants in New Jersey.
Additional arguments against raising the minimum wage stem from the perceived stereotype that low-wage workers are teenagers. However, data show that the median age of the low-wage worker is 34.9.
“By no means are minimum-wage workers just teenagers. More and more adults working full time are receiving minimum wage or close to it,” Shulman said. “There are many, many working poor families that will benefit from an increase. Opposition isn’t wrong from an economic standpoint, but it’s just cruel to argue against this.”
For better or worse, Colorado may see less of an economic impact with such a wage increase because its economy already is strong compared with that of other states, said CSU economic professor Stephan Weiler.
“Minimum wage may not be quite as relevant in places like Fort Collins or Boulder, partially because the cost of living is higher than in other places,” he said. “Employers can’t necessarily offer minimum wage and expect to get a lot of workers.”
A U.S. Bureau of Labor report found that Colorado had 42,000 hourly employees making at or below the minimum wage in 2012, roughly 3.4 percent of the total 1.234 million hourly workers.
“We have a pretty educated workforce, which translates to less low-wage workers,” Shulman said.
Full-time minimum-wage workers in Colorado would see annual earnings of $21,008 under the $10.10 rate, an increase of $4,368 more than they are receiving today.
Although Cooper and others believe any resulting increase in prices would be minimal, business owners such as Mugs’ Callahan expect to have to increase prices to maintain profits if they are forced to pay more in wages.
“Most small businesses, especially in food service, are stoked for a 5 to 10 percent net profit,” Callahan said. “So while it is only a couple of dollars more per hour, if you add it up it would pretty much wipe out that margin. I would indefinitely have to raise my prices a minimum of 5 to 10 percent depending on the product.”
How a business manages its inventory can have a tremendous impact on the financial health of the company. Managed properly, inventory can be a great source of increased margins, higher revenue, or a combination of the two.