Minimum wage increase in U.S. states adds pressure to federal push — and small businesses

·6 min read

Minimum wage increases went into effect in 20 U.S. states on January 1, 2021, adding pressure to the debate over raising the $7.25 federal minimum wage.

At the same time, businesses are dealing with the financial implications of the minimum wage hike while also struggling amid the ongoing coronavirus pandemic.

“Everybody’s trying to paint this whole thing with one broad brush stroke,” John Horne, owner of the Anna Maria Oyster Bar in Bradenton, Fla., told Yahoo Finance. “$15 [minimum wage] is fine in Miami... but it’s not good in a small town, you know?”

More than 30 cities, along with 20 states, raised their minimum wage in the new year.

(David Foster/Yahoo Finance)
(David Foster/Yahoo Finance)

‘There’s such a deeply ingrained perspective’

The federal minimum wage, meanwhile, sits at $7.25 an hour, a number that has been in place since 2009. In a majority of states, the minimum wage is now higher than the federal minimum.

Data shows that the federal minimum wage has not kept up with increases in the cost of living. In 1968, a minimum wage worker earned $1.60 an hour. When adjusted for inflation, that same worker would make $12.17 today if wages were adjusted accordingly. As things stand, that employee is earning 40% less.

“A lot of it is really just political will,” Dave Cooper at the Economic Policy Institute told Yahoo Finance. “There’s such a deeply ingrained perspective that raising the minimum wage must lead to job losses, because it’s the basic sort of Econ 101 textbook understanding of the labor market.” Businesses “think that if my labor costs go up, … the only way they can think of is to cut back hours, cut staff. But they’re not thinking about the wider economy-wide effects.”

Business owners, however, are more concerned with the short-term costs of the minimum wage hikes.

Horne, the small business owner, argued that wage increases through state and local governments were “messing with supply and demand… the market should determine that, not the government.”

A 2019 report by the Congressional Budget Office found that if the federal minimum wage increases from $7.25 to $15 an hour, roughly 17 million workers would have their wages boosted would benefit while 1.3 million could lose their jobs.

“We did an annual business outlook survey,” Michele Siekerka, CEO of the New Jersey Business and Industry Association, told Yahoo Finance Live. “And our members told us that [they were] either cutting jobs, cutting hours, increasing cost, which isn't good for the economy either, and then cutting benefits. And we don't want to see any of those things happen, because all of those are negatives on our economy.”

Cooper noted that the “the biggest challenge businesses are facing… is not excessive labor costs — it’s a lack of customers.” And once the coronavirus vaccine rollout is complete, he added, the rise in consumer demand would induce workers being paid a higher minimum wage to “go out and spend those dollars.” That would lead to increased sales, the argument goes, which offset the labor cost increases.

Cooper’s research found that when the minimum wage previously rose, restaurants subsequently increased prices, employees’ households increased how much food they consumed at home and outside while reducing their total household debt.

NEW JERSEY, USA - MARCH 16: Bars and restaurants are closed that on the Hobokenâs busy street in New Jersey, United States on March 16, 2020. New Jersey residents were told on Monday that they should not go out from 8 p.m. to 5 a.m. as Gov. Phil Murphy recommended a statewide curfew as coronavirus ( Covid-19) pandemic. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images)
Bars and restaurants are closed that on the Hobokenâs busy street in New Jersey, United States on March 16, 2020. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images)

California is a unique case’

Several cities in California opted to offer a higher minimum wage than the state-mandated minimum of $13 an hour for employers with more than 26 employees. Places like Mountain View and Sunnyvale both mandate a minimum wage of $16.30.

“California is a unique case,” Cooper explained. While the state is on a schedule to reach $15 an hour by 2023, some cities in the state desired a faster process, so they accelerated the process.

But since “there are so many jurisdictions,” Cooper explained, “many of which are very close in proximity to one another that chose to enact higher local minimum wages. … if one jurisdiction raises its minimum wage, then jobs in that area suddenly become significantly more attractive.”

Consequently, Cooper added, the market compelled businesses — and eventually adjacent parts of the state — to raise their own wages to attract and retrain staff. “It became a race to the top.”

Mark Martin speaks on the phone inside the Brookville Hotel, closed permanently due to the coronavirus disease (COVID-19) pandemic, in Abilene, Kansas, U.S. October 10, 2020. Picture taken October 10, 2020.  REUTERS/Arin Yoon
Mark Martin speaks on the phone inside the Brookville Hotel, closed permanently due to the coronavirus disease (COVID-19) pandemic, in Abilene, Kansas, U.S. October 10, 2020. (Photo: REUTERS/Arin Yoon)

Our expenses are still more than sales’

Back in Florida, Horne, the oyster bar owner, estimated that if the minimum wage increased to $10 at the end of September, his payroll at his Ellenton store will rise by $144,000 in 12 months. And that store is just one of four restaurants he owns across the state.

“That’s a huge number, and restaurants operate on tiny margins as it is,” said Horne. “I mean, we're not making money right now. Our expenses are still more than sales.”

Many employers were already paying higher-than-minimum wages prior to the hikes. “We see a lot of folks today who have been paying the $12 for more years than up to this mandate because they could afford to do it,” Siekerka said.

Horne said all his employees in his kitchens earn more than $10 an hour. Only his tipped employees — from busboys to hosts to bartenders and servers — will be affected (and their wages will rise from $5.63 an hour to $6.98 an hour. Florida has a tip credit of $3.02 an hour). But many of them are already making between $20 to $40 an hour in tips.

Florida, Bradenton, Anna Maria Oyster Bar. (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)
Florida, Bradenton, Anna Maria Oyster Bar. (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)

The pandemic has been challenging, he added. When the crisis first hit and Congress passed the first stimulus package, Horne took out a Paycheck Protection Program (PPP) loan to pay his staff when the restaurants were closed. “I paid 383 employees for seven weeks … I paid them their normal wages, including tips,” he explained.

Horder noted that customer flow remains low, and he intends to apply for more stimulus funding.

“We’re still at 50% capacity,” he said. “So how do I offset? I obviously have to raise my prices, … [customers will] come out less often, … my sales are going to go down, and I’m going to need less servers.”

Aarthi Swaminathan is a reporter for Yahoo Finance.

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