. Photographer: Al Drago/Bloomberg© 2019 Bloomberg Finance LP
When the next recession hits and drives small businesses to the brink, we’ll see the ugly side of the $15 minimum wage hikes: massive lay-offs.
Minimum wage hikes are reaching fever pitch around America these days. State after state and city after city are racing to raise the minimum wage to $15 per hour.
Some states are raising minimum wage to match the cost of living, such as Ohio and New Jersey. Other states are raising it in response to legislation created to establish a “living wage.”
New York, for instance, passed legislation to increase minimum wage to $15 an hour in New York City by 2018. Washington D.C has also introduced legislation that aims to raise the minimum wage to $15, which will take effect by July 2020.
All in all, twenty states raised their minimum wages on January 1st 2019.
United States Employment Cost IndexKoyfin
There are a couple of reasons for the rush to raise minimum wage. One of them is the political appeal. Politicians want to be seen as caring for the millions of Americans being paid the minimum wage, and they show this by passing legislation to raise it.
Then there are labor unions, which support minimum wage hikes as they try to enlist more members in their ranks.
The problem is that politicians are behind the “curve”– the strong economy, that is, which makes minimum wage labor a scarce resource; and warrants higher wages, as companies compete for a smaller pool of workers.
Besides, a strong economy means higher corporate revenues. This means that employers can afford to pay the higher wages warranted by markets rather than legislators.
That can explain the relatively small number of Americans paid the minimum wage, only 1.8% of the labor force in 2017.
“So, increasing the minimum wage is likely to have a small overall effect on the economy, but a big effect on minimum wage earners,” says Dan North, Chief Economist at Euler Hermes North America.
Kamal Khan, Senior Analyst at Investing.com, says that investors shouldn’t be concerned. “There will be a lot of focus on the pressure of increased labor costs on margins when retailers report,” he notes. This could result in “knee-jerk selling. But it’s important for investors took look at all the productivity gains that came after the financial crisis.”
But what will happen when the next recession hits?
Things will be quite different for businesses. They won’t need as much labor as in good times. And they won’t be able to afford paying wages dictated by legislative rather than market forces.
That’s especially true for smaller businesses, which don’t have the same access as larger ones do to credit markets. Some of them may be pushed off the cliff.
In the 2008-2009 recession, for instance, US business failures jumped up to a massive 6,000 per quarter.
The result of this type of situation is that millions of low-income Americans will end up losing their jobs and joining the welfare lines, while others will find themselves losing opportunities for higher paid positions and in minimum wage jobs .
“The data is limited, but in the last two recessions the ranks of minimum wage earners swelled while total workers fell of course,” notes North. “In the 1981-82 recession, minimum wage employees reached 15.1% of the labor force.”
That’s the ugly side of minimum wage hikes.
To compound matters, there’s the issue of automation.
“There are many problems with raising the minimum wage: employers will either have to raise prices, or cut costs,” says Craig Kirsner, an Investment Adviser Representative at Stuart Estate Planning and Wealth Advisors. “One way they have been cutting costs is by using machines, such as the self-ordering machine McDonalds is employing.”
And there’s outsourcing. “It’s a tough world out there, and people have to understand that they are now competing globally for jobs,” adds Kirsner. “In today’s world, you can hire people in India and China to work remotely for you at a much lower hourly cost, which means that people globally will have to work that much harder to get ahead in this new world.”
The bottom line: Passing legislation to hike minimum wage at a time the American economy is booming will end up hurting those it is supposed to help — when the next recession hits home.