Wealth Management Blog

Posts published in February 2014

Why We Should Listen To Small Businesses About Wages

By JJ Burns

February 19, 2014

There's been a lot of talk about raising minimum wage levels in this country. In fact, there are efforts to raise the minimum wage going on in 34 states.  Supporters of a higher minimum wage say the issue is that no one can live on minimum wages anywhere. Boosting it, they say, will give the economy some extra juice.

We’re all for giving the economy more juice. The recovery that started in 2009 has been among the weakest on record.  Housing activity is still depressed compared with pre-crash levels. More than half of all residential construction jobs disappeared during the crash and only five percent of them have been recovered. News reports say there's a recovery in manufacturing, but it's hard to see. Employment in auto manufacturing is still 38% below the June 2000 level.

The unemployment rate fell to 6.7% in December and held at that level in January. But no one is cheering. One reason the rate is falling is that workers are leaving the work force.

So, yes, there's a problem. Yet, when I listen to all the talk about raising the minimum wage or instituting what some call a living wage -- enough for a family of four to get by on, I find myself thinking about what I hear from many clients who are small business owners. If the minimum wage goes up, they say, they'll be forced to cut jobs or reduce hours.

Small business owners are always thinking about labor costs. I often talk to owners of fast-food restaurants; some 88% of McDonald's restaurants are owned by franchisees.  Fast-food operators are ahead of the talk about rising minimum wage rates. They're already looking for ways they can automate their processes. What does it mean? Fewer jobs, fewer hours, reduced or no benefits.

I can't blame them. Business people are in business to make money. If you squeeze profits, something will give. This is especially true for publicly held companies, where a stock can be crushed if results miss Wall Street estimates.

Check out this Bloomberg graphic to see how minimum wage levels vary from state to state:

So, if minimum wages are raised, there will be short-term benefits: more spending, more fuel for the economy. That's good. But proprietors find ways to cut costs. In the long run, then, nothing will change. I admit it's a vicious circle.

The fact is our economy has undergone profound changes in the last, say, 20 or 30 years. Manufacturing is a shadow of its old self. Whole industries are shrinking fast, like newspapers, even banking. Uncertainty rules, especially for those without a job or facing a job loss and, ultimately, seeing their incomes cut substantially.  Income inequality is rising.

I don't think simply raising the minimum wage will solve these issues. The government can't create long-lasting income gains, and it shouldn't be in the job-creation business.  I understand the need for safety nets. In times of major economic stress, they're very important. A stronger recovery will help mitigate some of the issues. Most importantly, I believe new opportunities will emerge when people are willing to take the time to get more education and improve their job skills.  This can help an employer grow his business faster, boosting profits, and subsequently boosting benefits and wages for all.