Raising The Minimum Wage | Critical Effects On Businesses

criticalfinancial.comIn case you missed the State of The Union Address on Tuesday, like I intentionally did, you may have missed the mention of raising the Federal Minimum Wage to $9.00 per hour.  It got me to thinking, that there would be a great impact on businesses that are often over-looked by our friends in Washington.  Now, as we know many of them have never run so much as a lemonade stand, so they look at the increased minimum wage from a different perspective than a business owner.  I understand their concern with wanting to help the “middle class”, at least this is explained as their objective.  Let’s be honest, is someone making $9 per hour, really in the middle class?  Broken down; that is 2088 working hours a year times $9 each hour, which comes to $18,792.  Is this middle class now?  Don’t get me wrong, there are a whole lot of great hard working people making minimum wage, providing a great service to their employers.  I am by no means trying to minimize those who work for minimum wage, I am only trying to make a point that maybe our definition of “middle class” has broadened.

Lets look at how raising the minimum wage effects the employer first, then I will point out some affects on the employee as well.  If I own a McDonalds, with 20 full time and 10 part-time employees and a total annual payroll of say $378,450 which is if all employees made the current minimum wage of $7.25/ hour. So thats $15,138 per full time employee and $7569 for each part-time employee, less benefits and not including salaried management.  What happens to that same McDonalds, that now has to increase its payroll to $469,800 which is a 24% increase, overnight?  Do they make and sell more hamburgers, fries and chicken nuggets?  Well there is only so much time in the day, they do well to be able to serve the customers they have with the manpower the have, already.  On the contrary, what would likely happen is they would lay workers off.  That part-time employee who is working a few extra hours after school to save up for a car, or for college, well they become expendable.  That full time employee who has occasional issues with being late, or complains about the work, they are expendable.  Maybe they could raise the cost of a Big Mac, or start charging for napkins, but all that must get approved through corporate first.  Meanwhile the individual franchise owner must deal with this 24% payroll increase, once our friends in Washington give it their blessing.

Raising the minimum wage has broad consequences.  Ultimately, corporate would agree to increasing the cost of a Big Mac, so what is now$4.00 for a Big Mac, becomes $4.20-$4.50.  So now, increasing the cost of the entire McDonalds menu will maybe change the customer’s habits.  That customer who goes through the Drive Thru every morning for their cup of coffee, maybe just makes coffee at home.  That customer who enjoys a McDonalds lunch, on average three days per week, now has to drop their frequency down to one.  Then there are the costs often overlooked by the customer, raw food costs, delivery costs, insurance, paving the parking lot.  All these go into running the business and none of these costs go down.

Ultimately, this becomes a slippery slope, at what point does raising the minimum wage, become ‘not in the best interest of the franchisee or the corporation’?  If this becomes the case, and McDonalds start to close down, then who has won, the Corporation?  No!  The Franchisee?  No!  The Public?  No!  The Employee?  No!  Maybe the winners are our friends in Washington who can then claim to be working for the middle class, since they got their wages increased!  Maybe, they should go back to academia and leave the growing of the economy to the fine businesses and employees who succeed at it day in and day out!

Your thoughts?

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  1. chrisholdheide says:

    I would agree Jim this is going to affect a lot of businesses that hire the lower income workers such as fast food to hotels. Personally I feel that instead of having the government step in on this issue I feel we should let the market dictate what it should be. If you live places like New York and California the pay is going to be higher while were I live in Ohio it’s going to be about half as much. I feel this is a better strategy than forcing it up and potentially killing thousands if not millions of jobs.

    • Jim says:

      Well said Chris, totally agree. For some reason our friends in Washington dont want to let the market dictate success, they feel that they can do a better job at dictating success.

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