Raising the minimum wage makes for good politics, but small businesses are plenty worried. Photographer: Patrick T. Fallon/Bloomberg
Raising the minimum wage makes for good politics, but small businesses are plenty worried. Photographer: Patrick T. Fallon/Bloomberg

The New York Times has an article on small-business owners facing minimum-wage increases. A lot of them aren’t sure how they’re going to cope:

"Dolores Riley has many questions and few answers. Along with every other employer in New Jersey, she woke up on New Year’s Day to a new minimum wage -- $8.25 an hour, up from $7.25. Even before the increase, Ms. Riley, who owns Gramma’s School House Childcare and Learning Center in Cinnaminson, had been operating on the razor’s edge.

"Since 2008, the number of children her company cares for has dropped to 40 from 75, reducing her annual revenue to $350,000 from $600,000 and forcing her to cut her own salary 75 percent. In business since 2000, Ms. Riley said she paid all of her 16 employees more than minimum wage -- her lowest-paid workers make $7.75, the highest $15 -- but she fears that increasing the minimum will force her to raise everybody’s pay to maintain her structure.

"The latest increase, she said, is likely to add $10,000 to $15,000 a year to payroll costs that already make up nearly 80 percent of her operating expenses. 'This really scares me,' she said. 'I hope I don’t have to close.'”

The minimum wage isn’t such a big deal for businesses where labor is only a small part of their costs. But for people like Riley, it can be the difference between profitability and not. Especially now, when the economy makes it hard for lots of businesses to raise their prices.

In other words, a recession is probably the last time you want to be raising the minimum wage: It’s the time when you’re most likely to price labor-intensive businesses out of the market entirely, hurting businesses and employers alike. So why is there so much pressure to do it now, when the economy is so fragile?

Paradoxically, that very fragility may have led to the pressure to raise the minimum. Since the 1990s, we’ve been having “jobless recoveries” from recessions. In both the Clinton and Bush years, employment took surprisingly long to recover from troughs, a factor that economists have attributed to a structural change in our economy: Instead of laying off workers -- who are recalled when demand rebounds -- employers are more likely to permanently restructure during a recession so that workers need to find other employers, or other industries, to hire them. That process takes much longer, especially if it involves retraining, and so employment tends to lag demand.

But this recession has been far worse than the previous two recessions. Workers who previously had higher wages are outstripping their savings and being forced into lower-wage work. And workers who might have moved up the employment ladder from minimum-wage jobs feel stuck there. The more workers who feel trapped in low-wage work, the higher the political pressure to raise the minimum wage.

If you believe, as I do, that demand curves for labor slope downward, just like almost every other demand curve, then increasing the minimum wage is probably a bad idea right now. But the political logic is impeccable.

To contact the writer of this article:
Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article:
Brooke Sample at bsample1@bloomberg.net.