America may have one of the strongest economies in the world, but it is still highly dysfunctional. Those who participate in it know that it is easy to become trapped by debt, that it is easy to become stuck in a low-paying job with stagnant wages, and that it is easy to become a pessimist about personal financial situations and the economic outlook at large. In January, a Gallup survey revealed that more Americans believe they are worse off financially now than a year ago. Economic confidence is trending lower, with more Americans reporting that current conditions are poor and most reporting that it’s getting worse.
In his 2013 State of the Union address, President Barack Obama described the economy as he saw it: “Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by — let alone get ahead. And too many still aren’t working at all.”
How to address this problem has been the subject of an enormous amount of debate. Nearly 50 million Americans lived in poverty in 2013, or about 16 percent of the population. Because of the stagnant or worsening wage environment for low-wage workers, millions of Americans have found it impossible to raise themselves out of poverty — or worse, have found themselves slipping further into an economic pit.
One of the cornerstones of Obama’s strategy to combat the the economic problems facing America is the minimum wage. In his 2013 address, the president argued that “in the wealthiest nation on Earth, no one who works full-time should have to live in poverty,” and in 2014, he punctuated his argument with a call to action. Obama argued, “Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover.”
Costco (NASDAQ:COST), a big-box retailer blessed with a strong business model, market leadership, and competent executives, pays a starting wage of $11.50 per hour. President and CEO Craig Jelinek has publicly endorsed raising the minimum wage, arguing: “An important reason for the success of Costco’s business model is the attraction and retention of great employees. Instead of minimizing wages, we know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty.”
The president is clearly on board with this idea, which is broadly representative of the pro-raise argument. Purchasing power is all important, particularly at the lower end of the wage spectrum, where non-discretionary expenses (life necessities, the cost of living) consume a high share of income. If lower-income workers make more money, they will spend more money, and spending is the steam that turns the pistons of the economic machine.
“Today, the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” said Obama. “Tom Harkin and George Miller have a bill to fix that by lifting the minimum wage to $10.10. This will help families. It will give businesses customers with more money to spend. It doesn’t involve any new bureaucratic program. So join the rest of the country. Say yes. Give America a raise.”
But “It’s hard to define a minimum wage,” said Lenny Verkhoglaz, CEO of New Jersey-based Executive Care. “Will $10.10 take people out of poverty? Probably not.” The data echo this position. At $10.10 per hour, a full-time job will pay about $20,000 per year. Depending on circumstances (hours worked are not always consistent), this may or may not technically put a household of three over the 2013 federal poverty guideline of $19,530.
Verkhoglaz, who pays his employees more than minimum wage, fears that cost increases will “end up on the backs of employers.” Instead, he argues, “I think the government along with private institutions should offer better opportunities (i.e. educational or training incentives) for people at the minimum wage level. In short, minimum wage should be an entry point for people.”
“I believe that the wage increase will cause small business to look to cut jobs and reduce payroll expenses or cut employee benefits in order to keep their costs in line,” said Roger Murphy, CEO of Murphy Business & Financial Corporation. In the restaurant industry, Murphy points out, labor costs usually run at about 30 or 35 percent of revenue. Factor in other costs and your average restaurant is operating on a pretty thin margin.
The president, Jelinek, and supporters of the minimum-wage law may counter that higher wages will pay for themselves in the form of reduced churn and increased productivity; Murphy and others disagree. “I do not believe that raising the minimum wage rate will cause employees to work any harder,” said Murphy. While money can be used as an incentive, critics of the minimum-wage proposal see a greater motivation at work in the labor force, call it character or force of will.
“I believe that people have a certain work ethic or pride in themselves, or they have an ‘I don’t care’ attitude where they just get by doing the minimum,” says Murphy. “I believe that they will continue to either work hard or to hardly work, just as they did before the wage increase.”
“People motivate themselves,” said Scott Griffiths, CEO of California-based 18|8 Fine Men’s Salon. “All we can do is incentivize and stimulate and provide opportunity.” People on both sides of the aisle probably agree with this sentiment in theory, but the debate over the minimum wage shows deep disagreement over what the best way to help people help themselves is.
One area where both parties seem to agree is that the entire minimum wage issue may best be left up to states. Obama called on governors and state legislatures to tackle the issue because it doesn’t look like a minimum-wage bill will make it through Congress anytime soon, while business owners like Murphy take a slightly more pragmatic angle.
“I do believe that states should address the issue, as the cost of living is much different in different geographical area of the country,” he said. “What works in New York is not necessarily good for Kentucky.” According to a cost-of-living calculator developed by CNN, the cost of living in Louisville, Kentucky, is as much as 40 percent lower than it is in New York City.