This month the future cost of labor just went through the roof. Both California and New York have passed legislation that would gradually increase the minimum wage to $15 an hour by 2022. After the 2022 deadline, wages would then rise with inflation, yet the governor of each state would have the option to delay these increases during periods of economic difficulty.
California and New York are not alone in their push to increase the minimum wage. Several other state and local governments have or are in the process of initiating their own legislation. As of 2013, more than a dozen states and local governments have increased their minimum wages. This includes Connecticut, Maryland, Hawaii, Massachusetts and Vermont, as well as Seattle that has committed to raising its minimum wage to $15 an hour by 2018.
While in California and New York small businesses with fewer than 25 employees would have an extra year to figure out how they are going to deal with the increase in wage costs, it is going to be a big challenge. As an example, according to the Employment Policies Institute, a small business who has 20 employees making minimum wage will see a $10,000 annual increase in wage costs for every 25 cents the minimum pay is raised.
That’s a hefty cost to bear for a small business working with a tight profit margin. In fact, many experts, activists, academics, and politicians across the political spectrum have pointed out that sudden and significant increases to the minimum wage puts a strain on American employers, leading to widespread layoffs, budget cuts and business closures.
Moreover, an increase in minimum wage will also lead to an unpopular increase in consumer prices, since businesses will need some way to cover the significant increase in operating expenses. Trying to cut costs in other ways may render the business ineffective and uncompetitive. Yet, there may not be so many alternative options available to them.
Finally, for some smaller businesses there is also the issue of being competitive in a global market place. There are two main ways that an increase in wage costs will put American small businesses in a disadvantage. First, if the cost of American products or services are more expensive than the equivalent products and services found in other, less expensive countries, then there will be less demand for them abraod. At the same time, if Americans can get cheaper imported products, then there will be less demand for things that are Made in America.
While an increase in the minimum wage may sound admirable in theory, in practice it may be doing much more harm than good, and it may only end up hurting the very ones it is trying to help.