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Minimum wage increase could lower profits for some but help overall economy
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Many industries use low-wage workers to keep costs down and bolster profit margins. While a number of states have raised the minimum wage, the federal minimum wage has been $7.25 per hour since 2009. However, the proposed Fair Minimum Wage Act of 2013 would raise the federal minimum wage to $10.10 per hour by 2015. This increase would roll out in three increments of $.95 during the two-year time period in order to keep wages on pace with the rising cost of living.
Although such an increase would help raise the pay of some low-wage workers, it would likely come at a price for businesses. For example, companies that primarily use minimum-wage workers would be forced to allocate a greater share of revenue to labor expenses. As a result, profit margins for these businesses are expected to take a hit if they cannot raise prices to sufficiently compensate for the rise in costs.
Industries impacted by an increase in wage rates typically share five characteristics: low capital intensity, low technological change, high wages as a share of revenue, low revenue per establishment, and relatively low average wages. IBISWorld has analyzed more than 1,000 industries and identified five industries whose profits may be vulnerable to a potential increase in the federal minimum wage.
Food preparation and serving
The food-service sector is the economy’s largest employer of low-skilled labor, employing 26.1% of all minimum-wage workers. Despite the high number of minimum-wage workers employed by the sector, wages account for a large share of overall costs for most food-service companies. The industry is heavily dependent on direct labor input across all operations, including ordering, food preparation, serving, cleaning, and management. Due to the competitive nature of the industry and relatively slim profit margins, any increase in the minimum wage is expected to hamper single-location full-service restaurants.
Although the Fair Minimum Wage Act of 2013 will negatively impact profit margins for many industries in the food-service sector, larger operators will likely be able to swallow additional wage expenses easier than smaller establishments. Large, multi-location restaurants are able to take advantage of economies of scale to distribute overhead costs across a broader range of stores. Additionally, large enterprises typically have higher profit margins and are expected to better handle increased costs compared with single-location restaurants.
Retailers use a significant number of minimum-wage workers. According to the Bureau of Labor Statistics, retailers employ 25.7% of all minimum-wage workers, meaning this sector is expected to be one of the most heavily impacted by any increase in the minimum wage. With wages accounting for a greater share of revenue, retailers’ profit margins are expected to take a hit. Although many retailing industries are expected to raise prices in order to compensate for higher labor expenses, industries that compete primarily on price are unlikely to do so. For example, operators in the used goods stores industry are not expected to raise prices in the wake of higher minimum wage requirements because the industry tends to focus on price-based competition. If operators in the used goods stores industry were to do so, they would have added competition from retailers that sell new goods.
In contrast, the health stores industry is expected to raise prices if minimum wage requirements increase. Although the health stores industry competes on price, the industry also competes on product quality and range. Additionally, industry operators have the added benefit of being able to charge a premium to consumers because demand for products branded as healthy remains relatively high.
Higher wages hurt industries with low technological change
Industries with low technological change and high wages as a share of revenue are more likely to be affected by an increase in the federal minimum wage, as they are less likely to undergo labor-reducing technological improvements. For example, the parking lots and garages industry is expected to be negatively impacted by a higher minimum wage as it has limited scope to improve profit margins amid increasing wage costs. With wages accounting for an estimated 26.4% of revenue in 2013, industry operators have limited means of reducing their reliance on labor, and thus wages as a share of revenue are expected to remain at high levels. As a result, higher minimum wage costs will likely hamper industry operators’ bottom lines.
On the other hand, although manufacturing industries employ low-wage workers, they are affected less by increases in the minimum wage because of relatively high technological change. Because manufacturing industries use automated machines to lower labor expenses, profit margins for manufacturing industries are not expected to be affected the same way as industries with low technological change.