Businesses say minimum wage hike would boost prices, cut jobs

Economists contend increase would stimulate economic growth

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March 28, 2014 | 1:25 pm

Some Corridor business owners say proposals to increase the federal minimum wage from $7.25 an hour to as high as $10.10 an hour will lead to higher prices and fewer jobs, a contention disputed by an Iowa City policy research group.

President Barack Obama, in his Feb. 12 State of the Union Address, proposed raising the nation’s minimum wage to $9 an hour in stages by 2015. Sen. Tom Harkin, D-Iowa, and Rep. George Miller, D-Calif., believe that doesn't go far enough.

Harken and Miller introduced a bill to gradually raise the minimum wage to $10.10 an hour over three years. The Fair Minimum Wage Act of 2013 and Obama's proposal also would link the minimum wage to an annual cost-of-living adjustment, a step already taken by 10 states.

The last time minimum wage was increased as in July 2009, as the final step in the Fair Minimum Wage Act of 2007.

But for Blane and Joyce Beschta, owners of the 16th Avenue Diner, 3130 16th Ave. SW in Cedar Rapids, the proposed minimum wage hike will mean raising menu prices.

"The last time the minimum wage went up in two steps, we tried to not raise our menu prices, but the cost of food went up a lot," Blane said. "We tried to keep our prices unchanged because customers will only pay so much.

"People are going to say that $3 for a cup of coffee is crazy, but that's what it's going to take if we need to raise wages to what is being proposed."

Joyce said the last increase in the minimum wage forced the couple to reduce staff, which is now a skeletal 13 employees.

"We eliminated having a hostess because we couldn't afford to pay another employee that much more," she said. "We have a bus person on Sunday now, rather than Saturday and Sunday.

"If we reduce our staff any further, our customer service will start to suffer. We also could purchase food of lesser quality, but we refuse to compromise our product."

Blane said some restaurants in Cedar Rapids are closing from 2 to 4:30 p.m. to reduce employee overhead. He noted that 16th Avenue Grill is closing earlier during the week, enabling it to operate with fewer employees.

"At our peak, we employed about 25," Blane said. "I track our numbers and we've really seen a drop in customers since last October. A lot of people were worried about the possible jump in taxes."

"We've also heard from people who were regular customers that the 2 percent increase in payroll taxes has caused them to eat out less," Joyce said. "A number of our younger employees asked what happened when they received smaller paychecks after the first of the year."

The U.S. Bureau of Labor Statistics reports that 25,000 workers in Iowa were making the minimum wage in 2011 and another 28,000 earned less than the minimum wage. Iowa businesses can pay a training wage of $6.35 an hour for the first 90 days of work by an employee under 20 years of age.

Employees that make more than $30 a month in tips can be paid as low as 60 percent of the minimum wage, or $4.35 an hour. The Harkin-Miller bill also would raise those minimum wages.

Lee Staak, franchise owner of the Hardee's restaurant at 2441 Coral Ct. in Coralville, said a lot of the rationale that has been used to support an increase in the minimum wage is faulty.

"Some people contend that it would stimulate economic growth and add jobs," Staak said. "If the government orders employers to pay more to workers when they're already not hiring, how will that cause them to hire more employees?

"In some cases, we have workers who are not as productive as they should be to earn the existing minimum wage of $7.25 an hour. When you add to that mandated fringes such as Social Security, unemployment compensation and health insurance coverage, it's a losing economic proposition for a small employer to hire a new worker."

Heather Gibney, a research associate with the Iowa Policy Project in Iowa City, said a study from the Economic Policy Institute estimates the minimum wage increase proposed by the Harkin-Miller bill would affect 332,000 Iowans, 81 percent of whom are 20 or older, and 45 percent of whom work full time.

"Increasing the minimum wage to $10.10 per hour would give $51.5 billion in raises to millions of workers over the course of three increases," Gibney said. "It would increase the gross domestic product by nearly $33 billion as workers spend their raises in their local businesses and communities.

"This economic activity would generate an estimated 140,000 new jobs over the course of three increases."

Gibney said the economic benefits would come "at little risk of the pitfalls forecast by opponents," particularly the loss of jobs.

"Despite economists’ thorough study of  the employment impact of the minimum wage, this ill-advised argument continues to drive opposition rhetoric against minimum-wage improvements," Gibney said.

"The Center for Economic and Policy Research has examined the most recent empirical research on the minimum wage since the early 2000s to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers.

"It found that minimum-wage increases are consistently associated with statistically significant and economically meaningful increases in the wages of affected workers. Employers and workers are able to adjust to an increase in the minimum wage through several different channels."

The study, authored by John Schmitt, senior economist with the Washington, D.C.-based Center for Economic and Policy Research, found some employers reduce the hours of employees after an increase in the minimum wage.

Still other employers reduce non-wage benefits such as health insurance and pension contributions.

Training also tends to be reduced as a way to trim overall payroll costs. Other approaches include raising prices or requiring a higher level of productivity per employee to reduce staff.

Gibney, taking up Harkin's argument that the current $7.25 an hour minimum wage is not a living wage, argued that nearly three-fourths of Iowa’s working single parents earn less than a family supporting wage.

"A single parent with two children has basic, no-frills monthly expenses of about $3,545, or $42,540 annually, according to the Iowa Policy Project’s most recent Cost of Living in Iowa report," Gibney said.

"This means that this family would have to make $48,111 a year before taxes were taken out and credits and cash incentives were included in order to support themselves — a supporting wage of $24.06 an hour. Using either that measure or the federal poverty level, the minimum wage does not keep a full-time worker out of poverty."

Gibney noted that the most current official poverty income guidelines for a single parent with two children is $18,498 — $3,000 more than for full-time minimum-wage work and much less than a family supporting income.

"The calculations that underlie the federal poverty guidelines assume that food is a larger expense than it is today," Gibney said. "It ignores the fact that housing and transportation take up a much larger portion of a family’s budget than they did in the 1960s when the guidelines were developed.

"Poverty guidelines also do not account for taxes, cash assistance, the increasing costs of child care and health care, and changes in consumer spending."

John Solow, professor of economics at the University of Iowa Tippie College of Business, said indexing the minimum wage to the rate of inflation would eliminate the political battles that accompany attempts to change the minimum wage.

"By not indexing it, we have created a situation where we set a new minimum wage and inflation erodes it so that the true value declines dramatically over time," Solow said. "We have to go through a big political fight to raise it when we think it's so low that it isn't helping people enough.

"That political battle takes time and energy away from other issues that may be more important."

While some proponents of raising the minimum wage claim the owners of restaurants and other small businesses are making enough money to absorb the higher wages, Blane Beschta disagreed.

"I added up all the hours I worked last year and didn't count the cost of my insurance, which is considered income. I only made about $2 an hour," he said.

"If the minimum wage goes up to $10 an hour, it would be better for me to work two minimum-wage jobs than to own a restaurant."

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