Minimum Wage 2.0

Seattle’s 2015 introduction of a $15 minimum wage from what was previously $9.19 reignited a national debate over income inequality. For the first time in recent memory, full-time workers earning the legal minimum wage can rely on their wages alone to cover all their basic costs. Ingenuity is still needed, however, to make Seattle an inequality-squashing model for the rest of the country though the model looks promising.

In order for the minimum wage to cover the basic necessities for an average household, The Alliance For a Just Society, a liberal activist group, estimated it would need to be at $20 per hour. For a single adult, they estimated a number closer to $16 an hour although Seattle mayor Ed Murray approximated that the average Seattle worker would need $21 an hour. Even though the new $15 an hour is below both of these estimates, it’s a step in the right direction.

The Seattle City Council is hoping that the higher minimum wage will significantly improve quality of life. City officials implemented the hike hoping to prevent workers from needing to borrow to make ends meet. According to recent data comparing cities, Seattle’s residents had the second most average debt at $26,000. Over $6,500 of that was in credit card obligations. Proponents of the new wage increase argue that it should help ensure that debt isn’t a necessary part of a low-level worker’s life.

Behind Seattle’s wage increase is the broader allegation that companies that have traditionally refused to use allocate excess revenues to support their workers should be legally bound to do so. This larger political issue is perhaps most prevalent in the fast food sector. Fast food worker protests nationwide have demanded wage increases to $15 per hour. Even with McDonalds’ much-publicized wage bump to an average of $10 an hour, its workers will still turn to welfare, family and Mastercard to make ends meet.

There is legitimacy and practicality to the idea that large corporations should take responsibility instead of the government. According to the University of California Berkeley’s Labor Center, workers of large corporations like McDonalds cost taxpayers $153 billion annually in welfare to make up for their unlivable wages.

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Among companies in the S&P 500, including McDonalds, 95 percent of earnings were rerouted to shareholders as dividends and share buybacks, according to Bloomberg. For McDonald’s alone, this will amount to over $18 billion spent on these gifts between 2014 and 2016. Rather than just paying these huge sums to investors, the company could pay its workers $15 an hour for less than half of this amount according to the 24/7 Wall Street Blog. While the job of publicly-held companies is to increase shareholder value, there is definitely enough cash to pay employees fairly. In an era where income growth is heavily slanted towards the wealthy, it seems only fair that some of that money should be rerouted to lower classes.

Even without reaching into its treasure trove of shareholder goodies, large corporations would see a fairly low impact from a $15 minimum wage. ABC News conveyed a report by Arnobio Maorelix, an undergraduate at the University of Kansas Business School, that estimated that McDonalds could absorb the wage increases with just a 17 percent increase in food prices. While Morelix’s analysis is probably a simple back-of-the-napkin calculation, the point remains that between a cutback on shareholder buybacks and a negligible increase in food prices, McDonalds could easily offer a $15 an hour wage nationwide.

While business models vary amongst companies in the S&P 500, they are likely similarly able to shoulder a $15 minimum wage. Together, S&P 500 employers account for over 15 percent of non-farm jobs according to Business Insider. This means that the initiative of a $15 minimum wage for just those companies could produce huge societal benefits. Costco, a member of the S&P 500 with over 150,000 employees, has proven that higher levels of compensation don’t have to necessarily harm a corporation’s bottom line. According to USA Today, Costco pays their average employee $21 per hour and has been commended by President Obama for its favorable wage.

While large companies that pay high shareholder incentives could probably shoulder a high minimum wage, the picture is not so clear for small business. Thanh Tan of The Seattle Times reported on small business owner Quynh-Vy Pham, who said that she frets about her company’s ability to keep up with the increased minimum wage. Pham, the owner of four Vietnamese restaurants in the Seattle area, said that she feels her business is threatened by the city’s wage hike. During the formulation of the law, an ethnic coalition of restaurant owners requested exemptions for businesses under ten employees, but were rebuffed. After the wage increase, it will no longer be possible for a hungry patron to walk into Pham’s Pho shop be able to pay for the entire bill with a ten dollar bill. By breaking the ten dollar price barrier, Pham and other casual restaurants worry that their products will be too expensive and consequently their business models will fail. With small businesses accounting for half of private sector jobs according to the Small Business Administration, the concerns of small businesses cannot be ignored.

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In Oakland, where a $12.50 minimum wage was introduced in March 2015, small businesses have already suffered significant effects. Privately held restaurants in Oakland have been forced to raise prices as much as 20 percent just a month after the wage hike. A poll conducted by the Employment Policies Institute, a conservative think tank based in Washington, D.C., surveyed 223 businesses in Oakland, virtually all of which had under 500 employees. It found that 56 percent of respondents considered the cost impact from the new minimum wage to be “large”, and 39 businesses said they would be forced to move out of the city. Using Oakland as a case study, an uptick in base wage seems to be impossible to handle for some smaller businesses, as opposed to their larger counterparts.

Some innovation is needed for a $15 minimum wage to be feasible nationwide for businesses of all sizes. First, the wage floor cannot punish small business. The rationale for a minimum wage is that it lifts up the working class, and this cannot be achieved if small businesses are simultaneously pummeled by cost increases that their business models can’t bear. While Seattle’s law sensibly delayed the burden of paying the full minimum wage on businesses with under five employees until as late as 2021, this is not enough. There should be a permanent exemption from the full minimum wage for companies under 500 employees. Squeezing these businesses undermines public support for a high minimum wage, particularly when large businesses are much better positioned to pay more. While small companies should pay employees enough to keep them above the poverty line, they should not be tied to a $15 minimum wage. The current $11 minimum in Seattle seems not to have hurt business too much, but the situation may worsen as the wage continues to rise.

Second, billing innovations should be emulated to better accommodate high wages. One of the companies that can afford a $15 wage is Ivar’s, a Washington-based company with over 1,000 employees. By eliminating tips and increasing menu prices, the company has been able to offer a $15 per hour wage while only increasing the overall bill to the customer by 4 percent. Such modifications should not only be adopted by any restaurant who can manage it, but by any other business who can stabilize pay by shifting around fees. These changes allow Ivar’s to offer its generous wages statewide. Yet in Oakland, such innovations are arguably illegal under labor laws. Businesses owners need to be given the legal leeway to follow Ivar’s example.

Finally, any feasible minimum wage should be adjusted for cost of living by city or state. Just as the minimum wage should be much kinder to small businesses to avoid a Procrustean mismeasurement, it should also be lenient towards cities or states with cheaper costs of living. The average wage between all states should sit around $15, adjusted for inflation, for simplicity. With this concern, even the lowest-level workers have the chance to be self-sufficient.

A new, dynamic minimum wage needs to be devised if Americans want to see all workers paid living wages. Consider a high minimum wage that exempts small businesses, adjusts for cost of living, and encourages price innovation like Ivar’s. Call it Minimum Wage 2.0.