As California and New York have passed legislation to gradually increase the minimum wage to $15 an hour while other states across the nation are considering the same, such measures will mostly hurt small businesses, many of which are struggling with thin margins, and entry-level workers, said Mark Vitner, Wells Fargo’s managing director and senior economist.
In a phone interview with the Business Journal, Vitner, who is based in Charlotte, North Carolina, said he doesn’t expect higher minimum wages to have much of an immediate impact on the overall economy, particularly since the wage hikes will be phased in over time. In the case of California, for instance, the minimum wage won’t reach $15 an hour until 2022.
While California’s law gives small businesses with 25 or fewer employees an extra year to comply, the higher labor costs will eventually negatively impact small businesses the most, since larger companies have greater access to credit and financial means, he said.
“It may not be as large of an impact for the economy as a whole, but it’s likely to hit a number of small businesses very hard,” Vitner stated.
Ultimately, a higher minimum wage will force small businesses to become more productive, which may mean that there will be fewer unskilled entry-level workers hired and fewer job opportunities for young people, he said. However, he continued, this could have dire consequences for business productivity in the future by resulting in fewer job applicants with skills down the road.
“[Raising the minimum wage] may force a little more productivity on to the system, because businesses will find ways to further reduce the number of workers they need, but that’s not producing the outcome we’re going after,” he said. “I would argue that it hurts productivity in the long run because, if fewer young people, fewer teenagers are able to land a job, then they’re going to be less skilled when they enter the workforce in their 20s. That’s my concern.”
A higher minimum wage will bring some “short-term relief” in productivity for business and higher wages for workers, but it won’t bring lasting change, Vitner said, adding that the best way to increase wages in the long term is to increase productivity through improving the nation’s education system.
“If we really want to increase wages, we have to increase productivity, and, unfortunately, there’s no quick fixes,” Vitner said. “To fix productivity, we have to fix education, which is primarily our public education system. We have to better educate our children. And you can’t turn that around in one presidential term or two sets of presidential terms.”
On a national scale, the ability of small businesses to pay higher wages is more limited than people might think, he said, noting that, a recent index report from the National Federation of Independent Businesses (NFIB) indicates that small business confidence in the United States has been declining over the past 15 months and is worse than it was during any previous economic recovery.
Vitner said small business optimism is at levels more typically seen in the depth of a recession, adding that the main reason for the slide is that the purchasing power of small businesses has diminished compared to larger companies with better access to loans.
“[Raising the minimum wage] is certainly a negative for small businesses,” he said. “Small business owners for the most part have seen their profit margins squeezed the last few years because they’ve been at a real competitive disadvantage to larger companies, which have greater access to credit.”
In the current economic climate, large companies are able to issue debt at historically low interest rates while small businesses are mostly only able to borrow against the value of a home or structure of their business, Vitner said.
“[Small businesses] are borrowing at lower [interest] rates than they’re used to, but they’re not getting these incredibly low rates that larger businesses are, and, as a result, they’ve had very little pricing power,” he said.
While other states may move to raise the minimum wage at the state level, Vitner said he doesn’t see Congress taking any action on raising the federal minimum wage, especially during the U.S. presidential election season.
The impact of a minimum wage hike in California, where the economy is thriving, mostly at coastal hotspots, such as the Bay Area, Los Angeles and San Diego, will likely be “minimal” at first, he said.
The greatest immediate impact statewide will be in small rural cities and in the state’s interior, where wages have remained flat and unemployment is still high, Vitner said.
“In many ways it’s high tide in California right now,” he said. “The economy is booming along the coast, and we see very strong job growth. The unemployment rate has come down rapidly . . . Where the impact would be greater is in parts of the economy where wages haven’t risen that much.”
Vitner added, however, that it’s unclear how the state’s move to a $15-an-hour minimum wage will impact the manufacturing sector and assembly jobs. He said companies in the apparel industry in Los Angeles County, for instance, might start moving to other states and countries with less expensive labor.
“There are an awful lot of manufacturing jobs, particularly in the apparel industry, that pay relatively low wages,” he said. “I don’t know that the industry can afford the immediate increases that are going to be thrust upon it, and we may see jobs shifted to other parts of the country or other countries.”
Vitner pointed out that, while the higher minimum wage will have little impact on the technology sector since most employees in the industry are highly compensated, it’s important to ensure the success of all industries, including those that provide low wages.
He applauded, however, California’s legislation that includes measures allowing the state to hold off on wage hikes if an economic downturn arises.
Nationally, some large metropolitan cities in the nation are able to handle a higher minimum wage better than others, Vitner said, adding that Seattle, Portland, Boston and New York City, for instance, continue to see strong high-wage job growth, while Chicago and St. Louis have had weak economic recoveries.
While Long Beach and Los Angeles have approved moving forward with their own minimum wage policies that are more aggressive than the state’s new minimum wage law, Vitner said such a move will only make it harder for small businesses to compete with businesses their own size and larger.
“I think businesses would like to have a more uniform minimum wage and set of codes to operate on as much as possible,” he said.
Furthermore, small business startup activity on a national scale has remained low, Vitner said, adding that local, state and federal regulatory hurdles have also played a major part in disadvantaging small businesses over larger companies.
“Larger companies can spread that around a little bit, but with smaller businesses you run out of time,” he said. “A small business owner is now a compliance officer, the head of sales and the head of credit . . . It’s just overwhelming, and [small business owners] can’t afford to hire people to do all these things.”