While Americans rang in 2022, small businesses across the country braced for a gut punch to their budgets. Twenty-two states raised their respective minimum wages on January 1 and another three are scheduled to do the same later this year. Additionally, more than 50 cities and counties are jumping on the bandwagon.
As a result, small businesses will be feeling the heat in 2022. And once the tight labor market loosens and the economy resets, employees will as well.
The consequences of raising the minimum wage too much too quickly is well-documented. When businesses can’t pass along heightened labor costs to price sensitive customers, the budget gap must be made up somehow. Reducing staff hours, cutting back on workers, and introducing more automation are common tactics. (Replacing staff with machines is even more attractive now given the pandemic-era labor shortage.)
If naturally occurring, the cycle of creative destruction is healthy. It weeds out the economy so small businesses have room to grow into bigger, more successful ones that generate more opportunity.
Believe it or not, even the major company I used to lead was once a small business. You may have heard of it: McDonald’s. But when the heavy hand of government dictates wage floors or implements over-the-top regulations, it sparks financial distress that wounds or kills what would ordinarily be successful enterprises in their infancy.
The nonpartisan Congressional Budget Office (CBO) has previously estimated what this upheaval looks like. Their report from last February finds that applying a one-size-fits-all $15 minimum wage nationwide would trigger job loss to the tune of 1.4 million positions.
Translation: After somewhat raising consumer prices, businesses will be forced to grapple with layoffs and explore automation to address the difference to stay in business. The alternative is throwing in the towel.
And the impact would likely be even more dramatic now compared to when the CBO report was released nearly a year ago. Given the inflationary effects of fast-and-loose government spending now being experienced by consumers, raising prices further to offset the extra labor costs is not a feasible option—that is, if you want to avoid customer mutiny. Therefore, employers must rely on the other, more painful budget fixes.
Three and a half million jobs that existed before the pandemic—largely concentrated among entry-level positions—are still missing in action. How many of those aren’t going to come back because of minimum wage increases or other government manipulation? Beyond those positions, how many new jobs will be sidelined and performed by robots?
Young people—especially those among minority groups—will be kicked the hardest. The hidden cost of unrealized job opportunities will trigger a domino effect that compromises their futures.
The lion’s share of entry-level opportunities that pay the minimum wage are leveraged by young workers or minorities with little job experience. Why? Because for many, it’s their first job and will help them gain experience to achieve a better-paying career down the road. I experienced this path firsthand. Beginning in Columbus, Ohio at the age of 22, I began my career at McDonald’s—first working as grill cook and then working my way through the ranks to eventually become president and CEO.
This career ladder needs to be preserved for future generations.
Naturally rising wages are a good thing because it’s usually associated with a strong economy. But when governments decide to dictate labor costs, employers and their workers get the short end of the stick. For the sake of budding entrepreneurs attempting to get their footing and Americans searching for a career path, policymakers should avoid raising the minimum wage further.
The next future CEO will be searching for their first gig.
Ed Rensi is the former President and CEO of McDonald’s USA and a member of the Job Creators Network.