How Increasing Minimum Wage Impacts Business

During his 2013 State of the Union Address, President Obama championed the idea of increasing the federal minimum wage to $9.00 per hour. The crux of his argument is that an American family cannot survive on today’s minimum wage; therefore, increasing minimum wage by $1.75 per hour will help lift families out of poverty and increase the middle class.

Respectfully, this is a bit short sided. If this simple act would increase wages but not increase costs of other things, then the President would be absolutely correct. The problem, however, is that by raising the cost of labor, businesses will be forced to raise the prices of their goods so that they will not lose money.

It has to be Paid for

Imagine the “value menu” at your favorite fast food restaurant no longer offering one-dollar items, but nearly doubling the price just to keep the net impact the same. Expecting employers to increase the minimum wages of their employees and “eat” the pay increase is preposterous. Increasing minimum wage will have to be paid for, and likely by charging consumers higher prices.

Increasing Minimum Wage Impacts Everyone

While the employees at the dairy farms that produce our milk may make more than minimum wage, and an increase may not impact them directly, they will be indirectly impacted. As they fill up their trucks to distribute the milk, gas prices will be higher because gas stations that typically hire minimum wage employees will increase their prices just to offset the increased cost of labor. Consequently, the retailers are charged more, and suddenly a $2-to-$4 gallon of milk jumps to $4-to-$6.

Already, many businesses are trying to figure out how they will cope with the increasing costs due to Obamacare and the penalties or increased premiums they will have to pay. Companies are looking over their staff requirements to see if they can do more work with fewer employees in order to escape Obamacare or the higher cost of even one more employee. Additionally, look for businesses to reduce wages of some of those middle-income workers to help offset the increasing minimum wage.

A Reverse Impact

The goal of increasing minimum wage to help families get above the poverty level will have a reverse impact. Those families that currently live off of minimum wage will have greater costs when they go to fill their gas tank or buy their bread and milk, thus keeping them at the same standard of living. I foresee that some middle-income families will drop closer to the poverty line because their wages will certainly not increase, but their cost of living will continue to escalate.

Those that are currently earning minimum wage may welcome the President’s proposal. If they think about the overall impact, however, they should realize that this isn’t good for the economy at large.