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Jan 6, 201409:27 AMOpen Mic

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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.

Retail trade

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.


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Jan 16, 2014 02:01 pm
 Posted by  Anonymous

Another thing that needs to be re-evaluated are the changes that were implemented due to welfare reform. Currently many low wage jobs in the same industries listed above are basically subsidized in Wiscsonsin by several hundred million dollars in child care and medicaid funding. Without any standards or requirements for the jobs the businesses hiring those worker have basically downgraded the jobs to the exent that a high percentage of the workers who are supported by federal state subsidies not only do not have full time jobs but do not often even have regular stable schedules with the ability to add additional part time jobs to increase their income. End result are higher profits for a lot of businesses while trapping a large number of families in poverty. A higher minimum wage would help but it also would be good to require businesses to show some outcomes when hiring workers supported by the various welfare to work subsidy programs.

Jan 16, 2014 02:46 pm
 Posted by  John

Minimum wage is earned by just 2% of the work force, and as you point out, more than half of those who earn minimum wage are single teens and young adults (i.e., mostly in school). Many of the rest of the minimum wage earners work for a supplemental income only (i.e., retired persons, or working spouses, or second jobs). So the minimum wage's impact on "working families" in the primary income role is less than one half of one percent. And sure, those kids are likely to spend their additional income, but is increased spending in the entertainment and imported consumer electronics industries really what we're trying to accomplish?

An increase in the minimum wage puts poor people out of work, makes it hard for young people to gain valuable work experience, and raises prices at the places the poor shop the most, harming them far more than it helps. Raising the minimum wage is bad economics and bad social policy. The only thing it's good for is making political hay at the expense of the poor.

Jan 16, 2014 02:57 pm
 Posted by  John

And one nit-pick from your article: You claim in great class-warfare style that corporate profits have increased but fail to differentiate how much of the profit came from overseas. You also make no note of how the Fed's quantitative easing has played into corporate profitability or attempt to discern in any way if the profitable corporations employ minimum wage staff (Apple and Google have been enormously profitable ... are they suppressing employee incomes to do so?). I know the "wages are down, profits are up" meme makes a nice, easy blame narrative, but it's also almost certainly untrue.

Jan 17, 2014 08:45 am
 Posted by  Anonymous

The statistics on who is affected by minimum wage increases are highly suspect. Anyone who has worked in a retail or restaurant operation probably realizes that when minimum wage increases take effect, many first line supervisors and shift leads are also bumped up accordingly to maintain the previous separation in wage rates. Assumptions made around part-time workers not supporting families is very dated. In my day, there were many high schoolers working in restaurants and retail. Now a lot of those part-timers have multiple part-time jobs and are supporting themselves and families.

It seems that even a few conservatives are starting to realize that a good way to get people off government subsidies is to value the work people are doing fairly. I would much rather pay a living wage to someone who is working hard via where I shop than to pay more taxes to support their health care, food stamps, etc. Check out Ron Unz of American Conservative who is making similar arguments regarding his proposed increase of California minimum wage to $12/hour.

Jan 17, 2014 08:16 pm
 Posted by  John

Saying the studies are "suspect" and "outdated" only reflects your wishful thinking. Federally funded studies of the effects of minimum wage increases in recent years concur that "the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups."

The disemployment of low-skilled workers was even the original racist impetus of the federal minimum wage: to keep blacks from competing for white, union jobs. It still works that way today.

Being in favor of a minimum wage hike because it "feels good" though it actually is harmful to the poor is the worst kind of patronization.

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