Minimum wage hike worries some business owners

Published 10:16 am Monday, April 21, 2014

By Annie Baxter

MPR News, 90.1 FM

When Angie Decker and her business partner started a new enterprise three years ago, they knew their labor costs would grow over time as they hired more staff. Right now their current staff seems about right and things seem financially stable.

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But now, Decker says under Minnesota’s new minimum wage law the firm’s finances could go to the dogs.

Decker’s business is called The Woof Room. It’s a daycare for dogs in Roseville. Decker’s not sure she can keep 14 people working there under the new minimum wage law.

“In our minds, it would’ve been great had we gotten to this third, fourth year where things had kind of stabilized and we’d gotten all our expenses to normalcy, we’re able to budget,” she said. “Unfortunately we are going to be hit with this also. So we kind of have to re-evaluate, as if you’re starting all over again.”

Last year, Decker says the Woof Room pulled in just over $500,000 in sales, which slots it into the category of a “large employer” under state law, and subjects it to the higher of two minimum wage hikes in state law.

Decker objects. She says it’s not like she and her business partner are rolling in dough. She says they each take home about $50,000 a year, once all their workers are paid.

“We definitely feel like a small business but we definitely will be treated like a larger one,” she said.

With some exceptions, large businesses will have to pay workers $8 an hour starting Aug. 1. Woof Room workers already start at that wage, so Decker won’t have to make any immediate changes.

But she doesn’t know how they will manage costs in future years as the minimum wage climbs to $9.50 an hour and then gets indexed to inflation. Will they have to cut back on staff? Must they raise the price of services, which currently run $28 a day? Or will they have to skimp on promotions and merit increases for more tenured workers?

“The next three years might be difficult to hold on to really good staff,” she said.

These costs are all real and documented in economic literature. But not many economists believe the downsides to raising the minimum wage exceed the benefits.

“There’s not a clear, widely held conclusion that the consequence is either positive or negative,” said Steve Hine, head of the labor market information office at the Department of Employment and Economic Development.

In theory, raising the cost of labor should lead to lower employment, Hine says. But empirical evidence hasn’t consistently borne that out. Some studies show a wage hike leads to job gains.

To Hine, Decker’s concern that it might be too expensive to keep good workers might not pan out. He says rising wages might help her retain them.

“There are more nuanced explanations that say, well, that by paying an individual more you do motivate them to keep their job — to avoid getting caught slacking off and getting fired,” said Hine. “So there would be an offsetting increase in those workers’ productivity.”

The problem is there’s no definitive evidence, said Anil Kashyap, a University of Chicago economics and finance professor.

Last year, he conducted a survey of economists on the potential effects of raising the federal minimum wage. A majority thought the overall benefits outweighed the costs. But the responses were far more lukewarm than in other surveys Kashyap conducts.

The evidence on minimum wage hikes is slippery partly because other things in the economy can absorb or mask the ill effects, he says.

“The minimum wage tends to get increased in times when, you can imagine the economy’s already doing somewhat better, and it’s very hard to find these effects.”

Decker acknowledges that the ill effects of a wage hike on The Woof Room could fade under the right conditions. “If we were bringing in more money that would help,” she said.

Meanwhile, Decker’s just glad she and her business partner have some time to plan before they have to deal with potentially higher labor costs.