The Minimum Wage Debate: Tripped Up on Small Business

Money Cut in Half


“The restaurant industry is dominated by small businesses,” National Restaurant Association member Melvin Sickler said when he testified before Congress in March. “More than seven in 10 eating and drinking establishments are single-unit operations.” Sickler, who owns several Auntie Anne’s Pretzels and Cinnabon franchises, was testifying before the U.S. Senate Health, Education, Labor, and Pensions committee in regard to a proposed piece of legislation that would have increased the federal minimum wage from $7.25 per hour to $10.10 per hour.

The minimum wage issue has moved back into the spotlight recently, arguably thrust there in February, when President Obama advocated raising the federal minimum wage to $9 per hour and indexing it to inflation in his State of the Union address.

“Even with the tax relief we put in place, a family with two kids that earns the minimum wage still lives below the poverty line,” Obama said. “That’s wrong.”

Continuing, he said: “This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets.”

While the president paints a rosy picture of a U.S. economy made healthier by a higher minimum wage, his position is hotly contested by business owners, members of the GOP, and the National Restaurant Association. Critics of the increased minimum wage argue that such a move would actually have a net negative impact on the economy because many minimum wage employers — like those in the restaurant business — operate on thin margins. Increasing the minimum wage would therefore force layoffs and salary reductions, curb business growth, and possibly lead to higher prices for consumers, critics argue.

“Food and labor costs are the two most significant line items for a restaurant,” Sickler said. “With average pre-tax margins of roughly 4 to 6 percent, increases in food and labor costs can have a dramatic impact on a restaurant’s bottom line. Only a small minority of restaurants will be able to handle a 39 percent minimum wage increase without taking actions that will harm workers.”

But that small minority of restaurants would include the largest employers, such as McDonald’s (NYSE:MCD), Yum! Brands (NYSE:YUM), and Wendy’s (NYSE:WEN). Outside the restaurant industry, other major minimum-wage employers that could arguably absorb the cost of a wage increase include Wal-Mart (NYSE:WMT).

In May, the House Committee on Education and the Workforce released a report titled “The Low-Wage Drag on our Economy: Wal-Mart’s low wages and their effect on taxpayers and economic growth.” The report’s thesis is spelled out in the title, and it’s important to note that the report was prepared by the Democratic staff of the committee. The detail, stamped on the report’s cover, bears some significance because of the fairly clear divide on minimum- and low-wage policy between the two major parties.

Demos, a research and policy center focused on economic stability, defines low-wage work as “a job paying $12 an hour or less, equivalent to an annual income of about $24,000 for a full-time worker. Nationwide, a family of four trying to subsist on $24,000 a year hovers near the poverty level. Even a single worker with no dependents would find no room in a basic budget for health coverage, a retirement nest egg, or building emergency savings.”

Using this definition, employment figures from a National Employment Law Project report, and estimates of the share of low-wage workers at each business, Demos calculated that McDonald’s and Wal-Mart employ a combined 1.48 million people at a wage too low to support a family, afford health care, or save for retirement. Demos places the companies in a bucket of corporations “aiming for the highest possible profit at the lowest possible cost.”

The National Employment Law Project showed that while low-wage occupations accounted for 21 percent of recession-era job losses, they accounted for 58 percent of recovery job gains. And while mid-wage occupations accounted for 60 percent of recession losses, they accounted for just 22 percent of recovery growth.

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