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Business sector warily watches effects of minimum wage increase on prices, staffing

Business sector warily watches effects of minimum wage increase on prices, staffing

'A ripple effect'

November 18th, 2018 by Philip Joens in News

Tymber Moore, left, and Victoria Conley build an Atlas sandwich for a hungry customer at Pita Pit in Jefferson City Wednesday, Nov. 14, 2018.

Photo by Mark Wilson /News Tribune.

As the new year approaches, a cloud is hanging over many Missouri businesses.

In less than seven weeks, Missouri's minimum wage will increase by 75 cents per hour. Earlier this month, 62 percent of Missouri voters approved Missouri Proposition B, which asked voters to raise the state's minimum wage to $12 per hour over the next five years.

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On Jan. 1, Missouri's minimum wage will increase from $7.85 per hour to $8.60 per hour. For the next four years, the state's minimum wage will increase by 85 cents per hour until it hits $12 per hour in 2023.

Business owners and business groups said the change will likely eventually lead to higher prices, but said they are sure of little else.

Jeremy Bryson employs six people at Pita Pit at 2727 W. Edgewood Drive. Starting pay for his employees is $8 per hour. Two currently make $9 per hour.

Already, Bryson runs a lean shop. In August, he closed his Columbia location and recently cut back on hours at his Jefferson City location. With January's minimum wage increase, he estimates his labor costs will increase by at least $300 per month. Bryson said he does not know where he will be able to make cuts to absorb that added expense.

"We're about as efficient as we can get," Bryson said. "Anytime you increase the minimum wage, there is always going to be a big ripple effect."

Proposition B amended a 2006 initiative, which voters also approved at the ballot box. The 2006 initiative raised Missouri's minimum wage from $5.15 per hour to $6.50 per hour.

Like the 2006 law, Proposition B also tied later raises to the minimum wage to the Consumer Price Index. Once the minimum wage reaches $12 per hour in 2023, the statewide minimum wage will be adjusted for inflation as the CPI rises.

Business groups said consumers won't see an immediate impact once the new year starts.

"The true impact won't be felt until it's phased-in in five years," said Ray McCarty, president of Associated Industries of Missouri, a Jefferson City-based trade group that represents businesses and manufacturers around the state.

David Overfelt, president of the Jefferson City-based Missouri Retailers Association, agreed, saying that raising the state's minimum wage will eventually force businesses to lay-off employees or cut hours for existing employees. In the short term, Overfelt said consumers and employees won't notice much of a difference.

"(Businesses are) going to have some decisions to make, but will it happen in January?" Overfelt said. "I don't know."

Bryson said he will be forced to raise prices sometime next year.

"My type of business is not going to make a profit until the loan is paid off for the equipment and the acquisition of the franchise," Bryson said. "So it makes it really tough for the first five or six years to survive."

McCarty said businesses with flexibility to absorb an increase in labor prices may do so in the short term, but most businesses will likely raise prices in the long term.

"In a competitive environment, their prices need to be competitive and still make a profit," McCarty said. "If one of their inputs goes up, they're going to have to raise the price."

Raise Up Missouri, a political action committee that led the campaign to put Proposition B on the ballot, said as many as 677,000 Missourians would receive a raise of $314 per week if voters raised the minimum wage to $12 per hour.

However, Aaron Hedlund, a University of Missouri economics professor, said other tools — like the federal earned income tax credit — fight poverty better.

"People want to give people who are struggling a pay increase," Hedlund said. "But you can't just wave a wand and eliminate poverty with the stroke of a pen."

Thomas MaCurdy, a Stanford University economics professor, wrote in 2015 that minimum wage increases actually work as regressive tax that places the largest burden on people at the lowest parts of the income ladder.

"More poor families were losers than winners from the 1996 (federal) hike in minimum wage," MaCurdy wrote in 2015. "Nearly one in five low-income families benefited, but all low-income families paid for the increase through higher prices."

Before the election, proponents of the Missouri increase said the phase-in period was designed to give businesses time to adjust to the change.

However, Hedlund said inflation could eat away at the pay increase that proponents hoped to give to minimum wage earners over that time. Like McCarty and Overfelt, Hedlund said businesses could simply use that period to find ways to automate jobs performed now by minimum wage earners.

"Let's say you drive an SUV and gas prices suddenly go up," Hedlund said. "But if you know that two years from now gas prices are going to go up, you may sell your SUV or get a more fuel-efficient car."

McCarty and Overfelt predicted businesses will cut back on hours and jobs as the minimum wage increases. Hedlund said the change will eventually slow entry into the labor market for teenagers and adults with few skills.

A 2017 University of Washington Study found raising the minimum wage above a certain threshold may reduce hours worked by low-wage earners. In April 2015, Seattle raised its minimum wage from $9.47 per hour to $11 per hour. On Jan. 1, 2016, the minimum wage rose again to $13 per hour.

UW researchers found the initial rise in wages caused businesses to cut an average of 1.9 percent of hours, a finding researchers said was not statistically significant. When the minimum wage rose again to $13 per hour, businesses cut hours an average of 9.4 percent.

This resulted in a loss of 3.5 million hours per quarter, or a loss of more than 5,000 jobs, the study said.

"The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss," the UW study said.

Jobs that pay more than minimum wage generally see modest increases in wages after minimum wage hikes, Hedlund said. Still, companies raise wages more during periods of low unemployment than they do after artificial barriers are placed in the employment market, Hedlund said.

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"Banning jobs below the threshold does not automatically create jobs above the threshold," Hedlund said.

Jefferson City reached full employment when it hit an unemployment rate of 4 percent in October 2014, according to U.S. Labor Department data. In recent months, Jefferson City's unemployment rate has hovered around 2 percent, according to the Federal Reserve Bank of St. Louis.

Despite the low unemployment rate, wages haven't grown the way economists like Hedlund suggest they should have.

As the country headed toward full employment over the past four years, average hourly earnings grew by just 2.3 percent from 2014-17, according to the St. Louis Fed.

Hedlund said the unemployment rate does not capture discouraged workers who left the workforce during the Great Recession in 2008. Even almost 9.5 years after the Great Recession ended, some workers are just re-entering the workforce, he said.

This slack in the workforce may explain why employers may not have incentives to boost wages yet even though unemployment rates appear low, Hedlund said.

"Up until recently, the economy hasn't been as strong as we thought," Hedlund said. "People saw 4 percent unemployment and thought we're at full employment, and those people are still trying come back in once the labor force absorbs all of those people on the sidelines."