Among the set of all economic discussion topics, the minimum wage increase certainly stands as one of the most polarizing. Slogans are chanted from “Fight for 15!” to “Fight for Zero!” with considerable controversy as to the true potential impacts of a minimum wage hike to $15/hour. Economists of course recognize the generality of such an argument. For one, a sweeping $15/hour policy inherently generates a massive disparity in purchase power parity (PPP) between different localities. In other words what $15 buys you in NYC may be drastically different than what it buys in Potsdam NY. This also ignores the implementation timing. The 2016-2017 New York State Budget includes the following proposals:
- For workers in New York City employed by large businesses (those with at least 11 employees), the minimum wage would rise to $11 at the end of 2016, then another $2 each year after, reaching $15 on 12/31/2018.
- For workers in New York City employed by small businesses (those with 10 employees or fewer), the minimum wage would rise to $10.50 by the end of 2016, then another $1.50 each year after, reaching $15 on 12/31/2019.
- For workers in Nassau, Suffolk and Westchester Counties, the minimum wage would increase to $10 at the end of 2016, then $1 each year after, reaching $15 on 12/31/2021.
- For workers in the rest of the state, the minimum wage would increase to $9.70 at the end of 2016, then another .70 each year after until reaching $12.50 on 12/31/2020 – after which will continue to increase to $15 on an indexed schedule to be set by the Director of the Division of Budget in consultation with the Department of Labor.
One would hope detailed research from respected economic scholars would help to stymie such controversy but as with most political discourse, it does so to no avail. The Institute for Research on Labor and Employment at the University of California, Berkeley released their policy brief just before the NYS Budget Deal was reached last month. The brief details their estimates on the state-wide economic impacts of the Governor’s then $15/hr minimum wage proposal.
For the sake of brevity I have left the link available for those who wish to read further into the details. The primary highlights of the brief are:
- Our results indicate that a $15 statewide minimum wage would generate a 23.4 percent average wage increase for 3.16 million workers in the state. This improvement in living standards would greatly outweigh the small effect on employment. And the increase in wages would help reverse decades of wage declines for low-paid workers.
- How can such a major improvement in living standards occur without adverse employment effects? While a higher minimum wage induces some automation, as well as increased worker productivity and higher prices, it simultaneously increases worker purchasing power. In the end, the costs of
the minimum wage will be borne by turnover reductions, productivity increases and modest price increases.
In speaking with a friend and local business owner recently however, I began to ponder how would this affect her and her business specifically. One can conceive without much loss in generality that the average fast food franchise could absorb the added labor cost increase in their margins and maintain positive cash-flow. In other words, they have the freedom to play the higher price vs. hit to the bottom line game and have little worry about keeping the doors open. A local small business however is far less predictable and very often runs on much smaller margins. Small businesses cannot take advantage of the economies of scale a franchise can offer and without teams of highly skilled management, inevitably leave cash on the table in terms of operations inefficiencies. The question is, can one then conceive of a minimum wage increase “affordability index”?
It is my objective to obtain nameless and addressless payroll and business income tax records to make wage increase comparisons. For what percentage of businesses is the proposed increase in minimum wage easily absorbed by current cash-flows and for what percentage does this pose a larger problem? Can a metric therefore be created to gauge the “affordability” of a minimum wage hike for any given business?
While such a study may provide less insight or value to the discussion as the IRLE study, the concept of affordability for small businesses should not be negligible irrespective of the net effects to the economy. Food for thought!