Potential Effects of $15 Min. Wage

(Adapted from an internal memo prepared by Mike Ensroth shared with our team 2/26/2021)

I’ve spent time researching the economic and business impact of a potential increase to a $15 minimum wage. This is a conversation that many of us have been having recently as a result of the COVID relief package. But it's not a new topic, with the ‘Fight For $15’ efforts dating back to 2014. The major difference is that it's now proposed in legislature with many advocates behind it.

I have researched the topic across 6-8 sources, trying to find the most bi-partisan facts to share with everyone. I am sharing these notes as a means to help inform all on the topic, so that we are prepared for further conversations. I put no political leaning on the notes and please do note, I have tried to incorporate as many research findings and forecasts to look at this through a broad lens. I say that acknowledging that there are a myriad of benefits that could come from a raise in min. wage, but they may not be overtly noted in the below, which is concentrated on impact to small business owners. 

 

Situation

• Federal minimum wage currently sits at $7.25 and has not changed in over a decade. A proposal, as part of the latest COVID stimulus package, is to increase to $15/hour.
• If an increase to a $15 min wage is passed, the current proposal has stairstep increases marked over the next five years to reach $15/hour in 2025.
• Tipped wages will be phased out with this plan. Tip wages (think servers, bartenders, etc) currently make at least $2.13/hour, $3.67/hour in Michigan for perspective.
• Roughly 2-4MM workers (or 2.5% of the hourly pay workforce) earn the federal min. wage or below.
• 52% of min. wage workers are in the food preparation or service-related industries.
• Min. wage workers are disproportionately young; over 50% are 16-24 years old. 24% of min. wage workers are teens.
• Most restaurants/retailers already need to pay above min. wage to attract and/or keep talent.
• Beyond the 2-4MM at min. wage, an additional 35-40MM earn just over min. wage and would also need an hourly pay increase. 

 

Realities

• Wage increases of this magnitude would lift many out of the poverty level, moving them out of qualifying for public assistance programs (SNAP/food stamps, child tax credits, etc). It is estimated that over 1MM would elevate out of the current poverty threshold.
• Some will try to reduce their hours to try and keep housing subsidies and/or other federal benefits.

• Min. wage increase would reduce income and gender inequality.
• Women represent 63% of min. wage workers.

• African Americans represent 18% of the min. wage workforce.
• Hispanics are 22% of the min. wage workforce.  

• Brands will be forced to pass price hikes to consumers to offset labor costs (along with rising food costs, utilities and other hard cost increases). Research suggests that many QSR’s and other industries will pass along 100% of increased labor costs to consumers. The net result, as modeled, is +5% or higher product pricing or -15% in product/portion-sizing to offset. 
• Raised min. wage will increase tax payments for individuals and could decrease employee benefits.
• 40% of surveyed CFO’s would reduce employee benefits to offset increased labor costs.

 

Assumptions

• Basic assumption: The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the lower the demand for your product (and in turn, the less number of workers you need to produce your product).
• The Congressional Budget Office believes a jump to $15 min. wage could lead to job losses of 1.4MM+. 
• An increase in min. wage will likely cause lay-off and/or decreased hiring levels for many small businesses.
• Employers have a hard time justifying higher wages to those with low skill levels, resulting in job cuts. A 10% increase in min. wage has led to a 1-3% decrease in employment of low-skilled workers. 
• The cost of childcare is said to increase +21% on average, negating wage gains for many.
• Some fast food brand CFO’s have modeled the effect of a $15 min. wage, saying that it would force the closure of roughly half of their locations. 
• Reports from within the hospitality industry suggest that min. wage increases will adversely decrease upward job mobility in the industry, keeping people locked into roles for extended periods.
• An increase in min. wage would lead to less employee turnover (from those jumping to another company for a minimal increase) and possibly increase productivity. 
• Raising min. wage will advance automated processes to replace service employees. Automated processes have already been fast-tracked due to the pandemic, so many brands/industries are well in motion on this objective.
• A min. wage hike will increase housing costs. Areas with limited housing supply will especially see boosted rental prices as more are now able to compete for available units. It is estimated that a $15 min. wage will cause a jump in monthly rent of +$200 due to supply and demand.
• A JAMA analysis concludes a broad look at the impact of increasing the minimum wage on health suggests that it can positively improve health outcomes for the entire population—but not without trade-offs. Depending on the state, increasing incomes could make people ineligible for public benefits assistance, including Medicaid, and ultimately harm instead of improve health.

 

Real World Examples

• Minimum wage hikes have occurred in parts of the U.S., so there are real examples of the outcome to draw on.
• The assumption was that workers would work at least the same or more to earn even more money with the increased hourly rate. In many examples the opposite occurred, with employees opting for less hours, as it now required less hours to cover their expenses. 
• This created an added hurdle for companies, especially in a tight job market, to replace the now uncovered hours.
• A hike in min. wage will cause many teens to lose jobs, as firms struggle to justify paying young workers with no skill or experience a higher wage. 
• The teen unemployment index fell 8% in just three months after Chicago increased min. wage.
• Recent increases in min. wage in areas has led to the closure of several Wal-marts and cancelled other expansion plans for the brand.
• As a barometer, the price of a cup of coffee (QSR/C-store/other) jumped +10-20% in California after min. wage moved to $12. Coffee prices rose +7% in Chicago when min. wage hit $10/hr.

 

Discussion

• Many believe that min. wage should be discussed locally/regionally, as there is too much regionality to the cost of living and labor market needs.
• Increased min. wage disproportionately harms the poorest areas. Employers in lower income areas would need to spend more than those in higher cost areas for staff, but would be unable to cover the costs by raising prices to levels their customers could not afford. 
• Min. wage has not kept up with inflation. With min. wage not increasing since 2009, the stagnant wage has lost over 10% of its purchasing power to inflation. Min. wage should at least keep up with inflation to not create such an imbalance in wages.
• If min. wage had kept pace with rising productivity and incomes, it would have been nearly $22/hr in 2012.

 

Hopefully this helps alleviate too many of us from doing added homework on the topic, but rest assured more studies will be released in the coming weeks on the topic.