Payroll: Raises All Around

States are hiking minimum wages

Joe Peceny's $1 million business, Anglers White River Resort in Mountain View, Ark., ekes out a profit mostly because Peceny keeps a close eye on costs. That's going to be a lot harder come October, when Arkansas will raise its minimum wage from $5.15, the current federal rate, to $6.25. Peceny, who pays about half of his 40 employees minimum wage, faces a $17,000 increase in his annual payroll. "That is a devastating blow," he says. "You can't jam this down the small business guy's throat. We can afford this the least."

The federal minimum wage hasn't increased in nine years. But states, which have the right to change the wage within their borders, have boosted it themselves. All told, 20 will have raised their wages between September, 1997, and fall, 2006, and bills or referendums to do so will soon be voted on in six more. The new minimums range from $6.15 in Maryland and New Jersey to $7.63 in Washington.

Proponents of higher wages note that only about 6% of U.S. workers--about 7 million--are paid the minimum wage or close to it. If the federal rate had kept up with inflation, it would now be close to $9, says Paul Sonn, deputy director of the Poverty Program at New York University Law School's Brennan Center for Justice, which has been involved with several states' grassroots campaigns.

Payroll: Raises All Around
The increases have many entrepreneurs, such as Peceny, worried. The National Federation of Independent Businesses and the U.S. Chamber of Commerce say increases will lead to job losses and higher costs for consumers. "When you arbitrarily tell a small business person they must increase the cost of labor, they have to find that [capital] someplace," says Marc Freedman, director of labor law policy for the U.S. Chamber of Commerce in Washington. He and others point out that minimum wage increases have hidden costs such as increased Social Security payments (FICA), state taxes, and workers' compensation. To survive, they say, small business owners will have to boost their prices.

But there's some evidence that the increases actually help small companies. Several studies of individual states that raised wages found that employees' standard of living improved, which in turn boosted the state's economy. A more comprehensive study was released in March by the Fiscal Policy Institute, a nonpartisan research and education organization based in New York. It found more small businesses were started in states that had raised the wage than in those that stuck to the federal level--a 5.4% increase vs. a 4.2% increase from 1998 to 2003. And job growth was 1.4% higher. Says James Parrott, deputy director and chief economist at FPI: "It's the Henry Ford effect--if you pay workers higher wages, they will tend to spend that additional income, which goes back into the local economy and boosts sales at small businesses."

Further, some small business owners say paying more stems turnover. Dennis Reina, co-founder of Reina Trust Building Institute, a five-employee, $2 million executive coaching business in Stowe, Vt., pays his two entry-level workers $10 an hour, though the state's minimum wage is $7.25. "We invest in our employees so we can retain our company knowledge and experience," he says. He hasn't lost an employee in four years.

Ed Shedlock isn't buying those arguments. His $1 million women's clothing store, Hoi Polloi, employs six people in Ann Arbor, Mich., where the state legislature voted in March to hike the minimum to $6.95. "There are all these unseen costs that people don't understand," Shedlock says, adding that his actual labor costs will be closer to $10 an hour once he factors in state taxes, FICA, and workers' comp. And at least one entrepreneur says the increase means the end of his company. The owner of a fast-food restaurant in the Detroit area, who asked not to be identified because his 13 employees don't know he plans to close, says three-quarters of his workers make minimum wage. His labor costs are set to jump 18%. "I can't just raise prices to cover this because I am not a big volume producer," this owner says. And he worries that if he has to pay some employees more, the rest will demand raises, too.

As for Peceny, he will put the brakes on four new hires he had planned in the coming year. "We will have to learn how to do more with less," he says. To most small business owners, unfortunately, that's a familiar predicament.

By Jeremy Quittner

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