Minimum wage hikes squeezing small business: Merrill Lynch

American companies are feeling the heat from rising minimum wages, and they may soon be forced to cut workers if rising profits can't offset the squeeze.

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“Cost pressures are continuing to hurt margins,” wrote Morgan Stanley equity strategist Michael Wilson, adding the small- and mid-sized companies that provide the bulk of jobs in the economy are bearing the brunt of the increases.

A strong U.S. economy and the tight labor market has boosted employee compensation, which has grown by 3.8 percent gross value added during this cycle, Morgan Stanley says, adding that a typical gain is 3.2 percent. The increases have been exacerbated by states like California, Illinois, New Jersey, and New York implementing a $15 an hour minimum wage.

At the same time, the firm says companies’ after-tax profits are now down 4 percent from their peak – close to the 4.2 percent drop that is typically seen.

So what happens next?

As the cost of labor continues to get more expensive, employers may start to cut worker hours. If it gets bad enough, layoffs may follow suit.

“The bottom line is there is likely not much room for employee compensation to expand further and eat into company profits before we should expect layoffs to begin,” Wilson added.

A NYC Hospitality Alliance survey conducted earlier this year found 75 percent of limited-service restaurant respondents expected to reduce employee hours because of the minimum-wage hike, and 53 percent said they would eliminate jobs because of the new mandate.

That jives with a July report released by the Congressional Budget Office, which said there is a “two-thirds chance” that a $15 an hour federal minimum wage would mean that “1.3 million workers who would otherwise be employed would be jobless in an average week in 2025.”

And if it gets bad enough businesses, like Restaurants Unlimited, will shut their doors according to a recent report by Fox News.

“Over the past three years, the company’s profitability has been significantly impacted by progressive wage laws along the Pacific Coast,” restructuring officer David Bagley said. “The result was to increase the company’s annual wage expenses by an aggregate of $10.6 million.”


The Seattle, Washington-based restaurant last month closed its doors after making several attempts to mitigate the cost of rising worker pay, including raising menu prices and adding a living-wage surcharge to bills.

Fox's David Springer contributed to this report.