The Effects of Raising Minimum Wage

More Cities and States Experiment With Boosts to Employee Pay

Fight for 15 Rally

Workers rally in April 2015 in New York City to support raising the minimum wage to $15 an hour.
Photo by Flickr/The All-Nite Images

National conversations about income inequality are getting louder, and a movement to raise the U.S. minimum wage to a fairer level is gaining steam. Opponents argue that mandated increases will cost jobs and raise prices, while advocates say a higher minimum will reduce income disparity.

The federal minimum wage is $7.25 per hour — where it’s been stuck since 2009. That gives a family of three with one adult clocking 40 hours a week at a minimum wage job slightly more than $15,000 a year — $5,080 below the federal poverty level.

In stark contrast, McDonald’s CEO, Steve Easterbrook, was paid $7.91 million last year. If he worked 60 hours every week, that equates to more than $2,500 an hour. By the same calculation, Wal-Mart’s CEO, Doug McMillon, would have earned about $8,200 an hour in 2014. Compare that with the $10 an hour Wal-Mart and McDonald’s pay their entry level employees.

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With a federal proposal to raise the minimum wage stalled, states are taking action on their own. Oregon passed landmark legislation in February 2016 that will implement a statewide hike in the minimum wage over the next six years, affecting rural and urban areas differently. The Portland metro area will jump from the current $9.25 an hour to $14.75 an hour by 2022, smaller cities will increase to $13.50 an hour and rural areas will rise to $12.50.

California and New York have followed suit with plans to phase in a $15-an-hour minimum wage, variable by a company’s size and its proximity to urban centers. Right now, 29 states have a minimum wage higher than the national rate. Since 2014, 30 cities and counties have passed laws to increase the minimum wage, including major cities, such as Los Angeles and Seattle.

How Hourly Wages Stack Up

Chart by Justin Garner

How Much Will Minimum Wage Increases Help?

Could business help create a healthier society in general if the minimum wage were high enough to offer basic financial security? A group of researchers at MIT says we should be framing the entire conversation around the concept of a “living wage standard,” examining the amount of money a family must earn to cover basic living expenses. The researchers have developed a Living Wage Calculator that takes into account local housing, food and medical costs. Not answered by the calculator: Will a minimum wage hike affect the ratio between a community’s income levels and its prices for housing, transportation and food? All the moving pieces could create an economic domino effect, making the overall effect of raising minimum wage complex and difficult to predict. If an increase in the legal minimum prompted companies to raise prices, for instance, the people most affected would be shoppers who earn lower wages. If wage increases can’t be passed on to consumers, businesses may cut jobs. Industries that employ lots of minimum wage workers and face international competition, such as agriculture, could be decimated if labor expenses rise even further above other countries’.

Denison Farms in Corvallis, Oregon, employs 30 people to grow organic fruits and vegetables, and owner Tom Denison supports higher wages but sees challenges. “Our job is to grow fresh produce and sell it for more than it costs to plant, harvest and pack,” he says. “Our labor costs currently are higher than all of our other costs combined. We’re competing with massive volumes of produce being imported from countries where agricultural wages are 10 percent of our own.” Currently, Denison says wages for his employees run from slightly above Oregon’s current minimum wage to a little more than $20 per hour. “We’ll need to increase everyone’s wages as the minimum is raised. We can’t be cheaper than the imported produce, so we must rely on those consumers who are willing to pay more for local.”

Denison and other farmers would like the government to balance the minimum wage hike with measures that protect their competitiveness in the agricultural sector. One possibility: regulations that restrict imports from countries that don’t pay comparable wages.

Several large companies have raised their entry-level wages. McDonald’s raised wages to $10 an hour in July 2015, and Wal-Mart, Gap and TJ Maxx have also announced plans to gradually raise their minimum wages. National retailer Costco pays its hourly workers between $13 an hour and upwards of $20 an hour — about two to three times the national minimum wage. Costco executives say these high wages create a more stable and loyal workforce while saving the company money it would otherwise spend on hiring and training new employees. Costco’s turnover rate is an impressive 5 percent annually — one of the lowest among major retailers. A hike in the mandated minimum wage, which would raise wages paid by every employer, would erase those advantages. Companies like Costco may have to raise wages further to achieve the same goals of improved loyalty and lower turnover.

Some businesses, including Chobani and King Arthur Flour, have sought an alternative solution by giving employees stock ownership or formal profit-sharing — potentially lucrative add-ons to their base salaries. Others are setting company-wide minimum salaries much, much higher than the $31,200 a full-time, $15-an-hour employee would make. Notably, Gravity Payments CEO Dan Price, made headlines with his promise to pay employees a salary of at least $70,000 within the next two years — and to cut his own salary to the same.

The question remains: Which of these solutions offers the most real benefit to employees? The varied minimum wage experiments underway across the country will at least give us a new understanding of the consequences, both economic and social.

This article originally appeared as part of the Trending department for the Summer 2016 issue of B Magazine.

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