The Push to a $15 Minimum Wage Probably Isn't Going to End Well

Source: U.S. Department of Labor via Facebook.

There is arguably no issue gaining more steam or attention at the moment than the minimum wage debate.

At the heart of the debate is the ability of low-income workers to earn a living wage. A living wage can be defined as sufficient income to pay for life's basic necessities, such as a roof over workers' heads, food, and electricity. These basic necessities have been difficult for millions of Americans to come by with the federal government not increasing the federal minimum wage since 2009. It currently sits at $7.25 per hour. For a worker making the federal minimum, they'd have to work 40 hours a week to earn $15,000 in a year -- and that's before taxes!

Based on data from the Bureau of Labor Statistics in 2013, some 1.5 million hourly workers earned the federal minimum, with another 1.8 million earning less than the federal minimum because they fell under one of the listed exemptions, such as being a full-time student or being a tipped employee. In total, these 3.3 million minimum wage workers represent more than 4% of the nation's hourly paid workforce.

It's also worth noting that these figures don't include data from minimum wage workers in the 29 states that have set a higher minimum wage than the federal government. In other words, the actual number of minimum wage workers around the country is probably a lot higher than the BLS is reporting.

Source: U.S. Department of Labor via Facebook.

The rush to $15The solution for a handful of local governments around the U.S. has been to boost the minimum wage themselves, typically asking local employers to scale up over a two to seven year time period.

Seattle's City Council, for example, voted unanimously (9-0) last June to boost the city's minimum wage to $15 per hour by 2022, more than double the current federal minimum wage. Keep in mind that Washington already has the highest minimum wage law in the country, at $9.47 per hour.

Under Seattle's minimum wage law, big businesses, defined as having 500 or more employees, will need to phase in the new minimum wage by 2017. If they offer health insurance to their employees, they'll get a reprieve to 2018. Smaller businesses have until 2020 or 2022 to become compliant.

Nearly a year later on almost the exact date, the City of Los Angeles followed suit by passing legislation to enact a $15 minimum wage of its own between 2016 and 2020. San Francisco also announced the passage of minimum wage phase-in laws in late 2014 to $15 per hour.

Source: (Los Angeles Mayor) Eric Garcetti via Filckr.

The thesis behind a $15 minimum wageAs was alluded to above, the thesis behind increasing the minimum wage revolves around putting more money in the pockets of minimum-wage workers. If workers were earning $15 per hour, the idea is that fewer of them would need government assistance, and they'd be able to afford life's basic necessities. Additionally, that additional money in the pockets of minimum-wage workers may find its way to cost-conscious retailers such as Wal-Mart. Retailers in these cities could be in for a notable boost in business.

Paying a worker a wage that's far above her prior minimum wage (and the federal minimum) could give her more incentive to take pride in her work. Inclusive of pride, a $15 minimum wage could also boost workers' morale as a whole. If workers are suddenly able to make ends meet, their stress level could drop, and their productivity could move incrementally higher.

If a happy worker truly is a more productive worker, then businesses in Seattle, Los Angeles, and San Francisco should soon witness an uptick in production or service efficiency.

This may not end wellAlthough the intentions of local government leaders are in the right place, my suspicion is that the "Rush to $15" isn't going to end well for current minimum-wage workers, businesses, and perhaps even investors.

For starters, some minimum-wage workers in major cities are already paid more than the minimum wage rate in benefits -- they just don't realize it. Think about the workers who get perks for working downtown, such as free parking or discounted mass transit passes. Some minimum-wage workers also get their healthcare covered through their place of employment.

This intangible pay does factor into an employees' wages from the aspect of the employer, but the employee may not be aware of it. If businesses suddenly have to boost workers' wages by 50% or more over the course of two to seven years (depending on the city), they could simply choose to scale back on the benefits offered to workers, leaving them exposed to the costs of downtown parking, or perhaps even their own health insurance.

Source: Flickr user Timothy Krause.

Next, businesses might choose to simply cut hours. Let's remember that while offering health insurance options to a full-time worker is the responsibility of businesses under the employer mandate section of the Affordable Care Act, businesses are under no such obligation if a worker averages less than 30 hours per week (the "full-time" cutoff as defined by the Affordable Care Act). This will help save them money.

Source: Flickr user Mike Poresky.

In addition to hourly cuts, we could see blatant job losses. Anthony Anton of the Washington Restaurant Association recently estimated that Seattle's restaurants budget about 36% of their expenses for labor, 30% for food costs, 30% for "other expenses," with the final 4% being the rough profit margin. If restaurants were to do nothing in lieu of the coming $15 wage, Anton estimates that full-service restaurant labor costs would rise from 36% to 47% of their budget, while fast-food restaurant labor costs would shoot up to 42%. In other words, that 4% profit margin would turn into a negative 7% margin, meaning that restaurants would close and people would lose their jobs. In short, jobs cuts appear likely.

But, rising expenses for businesses don't just end with minimum-wage workers. Tenured employees and managers may also need a boost in pay commensurate with their title or tenure. For example, a fast-food manager might right now be making $12 per hour, much more than the current minimum wage. If the minimum-wage workers' pay increases to $15 per hour, the manager's pay will likely need to rise by a commensurate amount in the interest of fairness. This is a cost some businesses (and investors) may not be factoring in yet.

High minimum-wage laws could also encourage new businesses to open up shop elsewhere. We've witnessed U.S. companies look overseas for cheaper labor in an effort to cut costs; there's no reason to suspect they won't do the same thing within the United States, too. For Seattle, San Francisco, and Los Angeles, it could mean a considerably tighter labor market with few new businesses opening up. In other words, job demand could far outstrip supply, making it veritably impossible for the unemployed to find work.

Source: Flickr user Ashley Basil.

Artificially boosting the minimum wage also disrupts the process of rewarding people with better skills or more qualifications. In theory (because we know it doesn't work this way all of the time), people with a more useful set of skills attained through years of work or via a college education should be paid more than someone with minimal skills or only a high school education. Income data from the Pew Research Center confirms this to be a fact -- at least with millennials aged 25 to 32.

However, boosting the minimum wage could have the opposite effect of improving productivity for businesses. It actually might disincentivize innovation and remove workers' desire to improve their socioeconomic situation because they'll be satisfied with the amount of money they make from minimum wage. Complacency is always a danger in the workplace, and a 50%-plus raise may ultimately wind up leading to less efficiency in the workplace.

Lastly, what's to stop businesses from simply passing along the cost of a minimum-wage increase to their customers? A number of restaurants in Seattle have already begun boosting their prices to accommodate higher wages. It's only a matter time before things like rent follow suit. It's my suspicion that in 10 years, the majority of the boost minimum-wage workers received will be wiped out by inflation.

Only time will tellIn all fairness, no one knows with any certainty exactly what's going to happen. Only time is going to give us those answers. But, Economics 101 suggests that while a nominal dollar increase in wages sounds great on paper, the resulting chaos it creates in the labor market vis-a-vis the skillset-to-pay ratio, as well as on worker benefits and overall inflation, could prove devastating.

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