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Small Business: Where Minimum Wage Hits A Wall

Amanda Wokciechowski |
November 18, 2014 | 1:06 p.m. PST

Contributor

 

As a 20-year-old college student, I’ve just started my journey into the working world by working part time in the music industry. As with most industries, you start at the bottom, and that comes with a pay rate known as minimum wage. 

My own minimum wage paychecks, however, weren’t my first experience with the low pay-grade. Growing up, I watched my father start a childcare business that employed many minimum-wage workers. 

Coming from an upper-middle-class family, I never had to work, so I never had to put a value on my time. Money was never a daily worry. While I was living comfortably, however, many people that worked for my family's business were living paycheck to paycheck. Starting my first job made me look at that business from a different perspective. My job made me ask, “Was I only worth $9 an hour?” This new evaluation of myself made me take a second look at what minimum wage means and the challenges it presents.

READ MOREAhead Of The Curve On Minimum Wage

As Los Angeles debates raising the minimum wage by more than 40 percent, I feel as though I’m caught in the middle of the divide. On one side, my paycheck could definitely use the boost that would come from a hike in the minimum wage. The commute to work alone eats up a third of the money. Living off my paycheck, around $500 a month, would be nearly impossible, especially in Los Angeles. 

On the other side, however, business owners like my father see the minimum wage increase as a threat to their livelihood and to the jobs their companies provide. L.A. Mayor Eric Garcetti’s proposal to raise the wage to more than $13 would represent a substantial new cost for a company.

Small businesses benefit in a few ways from minimum wage. Establishing a floor for wages levels the playing field by ensuring that businesses can’t undercut each other by paying workers less than competitors. But raising that wage floor by more than $4 an hour means huge new costs that must be accounted for somewhere else. I discussed this issue with my father, who stated it plainly: "There are only two places for the new costs to come from: raise prices or cut jobs."

READ MORE: Los Angeles Minimum Wage Raise Process Begins

At a service business like my father’s, labor costs are about 65 percent of total expenses. With the economy in the state it has been, our business has only been able to raise prices in small increments, if any, over the past eight years. In 2006 and 2007, we successfully raised prices 7.5 percent and 7.3 percent respectively to support raises and increased costs. In 2008, we were not able to raises prices at all.  Price increases from 2008-2014 ranged from zero to 4.7 percent annually, which has not covered the cost of raises and increased expenses over this time period.  Currently, if the minimum wage increased to $13.25, 145 employees out of 220 would get a raise. This would cost the company over $600,000 a year.  

But those who are currently making a little bit over the minimum would also expect a raise, meaning that the total increase in costs could be much higher. Workers’ compensation and other taxes and fees would also rise. My father gives a ballpark estimate of $150,000.  These increases represent significantly more than our business makes in profit in a year; we would have to raise prices over 15 percent to keep up.

That’s more than many parents can afford. The current price for an infant to receive full-time care is $1,850 per month. A 15 percent increase would take it to $2,125. Most of the parents using our services would not receive any increase in pay, so how could they afford such an increase in rates? 

An increase in the minimum wage would make it extremely difficult for my father’s company to operate profitably. So difficult, in fact, that as he looks to expand to more locations, he has refused to look within the city of Los Angeles as the minimum wage threat is too high.

READ MORE: Venice Workers And Business React To Minimum Wage Proposal

The other option, firing workers, means the first to go will be those with the fewest skills—those workers currently at or near minimum wage. So now, you will have minimum-wage workers making more money, however some may end up with no job at all. 

The American Enterprise Institute put the numbers into perspective: “Overall unemployment at the height of the Depression was about 25%. Especially for low-skill workers and for young workers, the two groups of workers who will be disproportionately hit by a minimum-wage increase, ours is a labor market in crisis.”

Another wrinkle? Salaried workers would also be impacted. Under California law, employees who earn a monthly salary, as opposed to working on the clock, must earn at least twice the equivalent of the minimum wage. At my father’s company, if the wage hike goes into effect, some of his managers would not meet the requirement and would be reclassified as hourly workers. This lowers their morale, as they are no longer in this higher category of management. 

When people receive raises and their pay goes up from the minimum wage, they feel they are more valued. I would love to be able to say that I make more than base pay. When the minimum wage goes up and workers are again making just minimum wage, they aren’t happy and they want even more. Why should someone who has taken 10 years to climb up to $15 per hour now be happy that someone brand new to the company at an entry level will make almost as much as they do? 


There is no easy answer. Neither side in this debate has a clear sense of what the stakes are for the other side. This lack of understanding is what has created a standoff in Los Angeles over $4. My situation has allowed me to gain some insight into the differing perspectives and see why each side is willing to battle so hard. It is a delicate balance of helping low-wage earners receives higher pay, without eliminating low-skilled positions.  

On the employer side, raising the minimum wage too quickly has the potential to force some small businesses to close. Any change to the minimum wage, however necessary it is determined to be, should be undertaken carefully and slowly.

Reach Contributor Amanda Wojciechowski here.


 

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