Businesses grapple with raise in minimum wage

02/09/2014 12:00 AM

02/08/2014 9:32 PM

Dolores Riley has many questions and few answers. Along with every other employer in New Jersey, she woke up on New Year’s Day to a new minimum wage – $8.25 an hour, up from $7.25. Even before the increase, Riley, who owns Gramma’s School House Childcare and Learning Center in Cinnaminson, had been operating on the razor’s edge.

Since 2008, the number of children her company cares for has dropped to 40 from 75, reducing her annual revenue to $350,000 from $600,000 and forcing her to cut her own salary 75 percent. In business since 2000, Riley said she paid all of her 16 employees more than minimum wage – her lowest-paid workers make $7.75, the highest $15 – but she fears that increasing the minimum will force her to raise everybody’s pay to maintain her structure.

The latest increase, she said, is likely to add $10,000 to $15,000 a year to payroll costs that already make up nearly 80 percent of her operating expenses. “This really scares me,” she said. “I hope I don’t have to close.”

On Jan. 1, 13 states raised their minimum wage, and an additional 22 and the federal government are expected to consider increases this year as well. President Barack Obama is backing a bill to raise the $7.25 federal minimum to $10.10 an hour, to be put into effect in three stages, with annual adjustments indexed to inflation. And in his State of the Union address, the president said he would raise the minimum paid to federal contractors by executive order.

There is widespread disagreement about the impact of the increases. Paul Ballew, chief economist at Dun & Bradstreet, says small businesses are a diverse universe, with some more sensitive to policy changes than others. That said, he added: “There remains a lot of economic pressure on small businesses. The downturn was so severe, and any time you have a policy change, you are going to get pushback. They’ve had a really rough go of it the past six years, and they’ve already squeezed out a lot of the fat.”

Others point out that the proposed increases barely keep up with inflation. The current federal minimum of $7.25, when adjusted for inflation, is about 23 percent lower than it was in 1968. In addition, the increases do not reflect an evolving labor landscape in which the number of minimum-wage earners who work full time has increased substantially, prompting some to ask: Is there never a time when the minimum could be raised without objection? And if a business cannot afford to pay minimum wage, might it be doing something wrong?

Riley said her options were limited. She has already laid off nine employees in recent years. Having raised her rates two years ago, by $5 an hour, she is reluctant to do so again – especially since it would take an increase of $30 a week per child, to $255 from $225, to cover the increased wages. That, she said, would cause many of her clients to withdraw their children and rely instead on less expensive (and unregulated) babysitters.

Cutting workers

Like Riley, Charlene Conway is watching her numbers. For 22 years, Conway and her husband have run Carousel Family Fun Centers in Fairhaven and Whitman, Mass. The business has annual revenue of less than $500,000 and depends exclusively on part-time minimum-wage earners, mostly teenagers, to handle tasks like running the snack bar and maintaining the games.

This year, Massachusetts is considering raising its minimum to $9 an hour, from $8. Should that happen, Conway said, she will probably need to reduce her staff of 20. Her employees currently make an average of $9 an hour, with managers earning from $10 to $15. Like Riley, Conway said that an increase in the minimum would force her to raise pay across the board.

And she, too, is reluctant to raise prices again. In 2011 and 2012, she increased her admission fees by a dollar – they generally run from $5 to $10 now, based on age and time of day. Another increase, she said, would just make things worse: “We will price ourselves out of business.”

In the past, when Massachusetts increased the state’s minimum, Conway responded by increasing the minimum age of her workers to 16 from 14. “I’m not going to pay a 14-year-old $9 an hour with no experience, maturity or work ethic,” she said. More recently, she has been hiring 18-year-olds with college experience. “What this does,” she said, “is eliminate the opportunity for young people to get started in the workforce.”

Should minimum wage reach $10 an hour, Conway said she would reduce her staff to 10 employees and double up on work tasks. “This is a slippery slope that could absolutely cause me to shut down and force me into bankruptcy,” she said.

Benefits of higher pay

But with income equality a political issue and with some studies challenging the notion that minimum-wage increases damage small businesses, there are also business owners who support the increases. These owners suggest that businesses actually benefit from paying higher wages because of reduced turnover and the additional money that goes into local economies.

Amanda Rothschild, co-owner of Charmington’s, a cafe in Baltimore, calls the arguments against raising the minimum “shortsighted.” Since opening in 2010, the cafe has paid new hires $8 an hour, more than the current $7.25 minimum (they also earn tips). “I think those against increases underestimate how business success is tied to employee satisfaction,” said Rothschild, who employs 11 people full time and three part time. She said her employees were part of the reason her cafe’s revenue increased to $600,876 last year, up 31 percent from $457,940 in 2012. She expects another increase this year.

Paying higher hourly wages was part of Charmington’s business plan from the start. “We felt that we would end up with more dedicated employees, who would be happier, and we found that to be true,” Rothschild said, adding that she had a 22 percent employee turnover rate, compared with a restaurant industry average of 50 to 75 percent. A stable staff, she said, helps productivity, saves her money on training and food waste, and leads to better customer service.

With Maryland looking to raise the state’s minimum to $8.25, Rothschild said she was considering several plans, including raising all base pay to $8.25 in preparation. She says she believes that it is possible to increase wages and still keep her payroll within 35 percent of operating costs without cutting hours, jobs or benefits. “I believe part of our costs in running a business includes investing in employees,” she said.

There are examples of small businesses that have made paying higher wages a cornerstone of their operations – and then grew much larger. Costco, for example, pays its hourly employees an average of $20.89 an hour (Wal-Mart’s hourly workers make an average of $12.81).

And when In-N-Out Burger, the California-based chain, opened in 1948 (the same year as McDonald’s), the minimum wage was 65 cents an hour but its founder, Harry Snyder, paid $1 an hour (plus one burger per shift).

Today, In-N-Out Burger pays a starting wage of $10.50 (McDonald’s pays on average $7.73 an hour by one estimate). It has close to 300 stores in five states (McDonald’s has more than 34,000 globally), and according to Technomic Inc., a research firm that centers on the food industry, it ranks second only to McDonald’s in revenue per location for fast-food chains.

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