Minimum wage hike could make business tough

Owners concerned they'll have to raise prices to cover employee pay increases

Posted: Monday, December 16, 2002

Some small business owners are concerned that the hike in minimum wage that takes effect Jan. 1 will force them to raise prices and lay off workers.

"There is absolutely no way we can't raise prices," said Charlotte Legg, owner of Charlotte's Restaurant in Kenai.

Legg said the $1.50 increase, which will bring the state's minimum wage to $7.15 per hour, will cause her payroll to increase by 25 percent.

She said keeping prices low and competitive has been difficult. The restaurant's insurance has doubled since the terrorist attacks of Sept. 11, 2001, and food costs have increased by more than 30 percent over two years ago, she said.

"This is very frightening to me," Legg said. "Such a large increase makes it hard for a small business to recoup."

January also is the slowest time of the year, which could make it even more difficult to generate the money, she said.

"People might not be able to go out as much," she said. "With less business -- we might have to lay people off."

House Bill 56, which raised the minimum wage and was signed by former Gov. Tony Knowles on July 1, includes three elements: it increases the minimum wage in Alaska to $7.15 an hour from $5.65 an hour; it causes the minimum wage to rise with the nation's inflation rate and be adjusted annually with the Consumer Price Index; and it states Alaska's minimum wage always will remain at least $1 above the federal minimum wage, which currently is $5.15 per hour.

The measure is identical to a citizens' initiative, which was scheduled to appear on the Nov. 5 general election ballot without legislative action. By passing the bill, the Legislature can change it next year. Had the minimum wage been increased by the citizens' initiative, legislators would have to wait two years before making any changes.

With no prior example of an increase this high, economists say they cannot accurately predict the effect of the wage hike on businesses and consumers.

Alaska Labor Economist Neal Fried said he believes consumers will hardly notice the difference.

"It's hard to tell," he said about the extent of the effect on prices. "We haven't experienced this before -- there is no precedent."

Sen. John Torgerson, R-Kasilof, who voted for the measure but would have preferred the bill not contain such a big increase, said consumers ultimately will pay for the wage hike.

"A cup of coffee is going to go up," he said.

While the increase may hurt businesses, it will give minimum-wage earners more money to spend.

Kristina Younger, who works at both Subway and at Little Caesar's Pizza Station in Kenai, said she could use the extra cash.

Although both of her jobs pay more than the current minimum wage, they pay less than $7.15 an hour.

She said living costs in Kenai, such as food, are higher than in Colorado, where she lived four months ago. To her, the increased wage means she'll be able to live a little more comfortably.

Approximately 14,000 Alaska workers make between $5.65 and $6.74 an hour, according to the Alaska Department of Labor.

Alaska's current minimum wage is 50 cents higher than the federal minimum wage, yet it is the lowest on the West Coast, trailing Washington, which is at $6.90, California at $6.75 and Oregon at $6.50.

After Jan. 1 it will be the highest on the West Coast, jumping above Hawaii's minimum, which will go from $5.75 to $6.25 in January.

Real earnings have been declining steadily in Alaska; wages have not kept pace with inflation, said Chris Miller, chief of the Research and Analysis Section of the Department of Labor and Work-force Development.

"It's a whole new equilibrium to shake out," he said of the minimum wage hike. "It will be different -- how different? It's hard to say."

Miller agreed economic pressures will cause businesses to try and recapture the higher labor costs by charging more.

"The downward pressure is the consumer will resist," he said.

Economists call it elasticity, where the pressures of supply and demand balance out, he said.

"Competition will prevent employers from raising prices," he said. "Supply and demand will determine if people are laid off or not."

Miller said such elasticity is inherent in a capitalistic society.

"That's what makes our economy tick," he said.

Most employers already have found the current minimum wage is not competitive, forcing them to pay workers more, he said.

Ed Ferguson, owner of Big John's Tesoro on the Sterling Highway, is an example. He said the raise in January will not affect him.

"My philosophy is if I pay more than my competitors, I get to say who quits," he said.

But Paul Miller, owner of Soldotna Trustworthy Hardware, said once the minimum wage rises again in a few years, he'll no longer be able to hire high-school workers.

"This is a bad situation," he said.

The minimum wage increase will cause his entire pay scale to shift. Currently, he has employees who have been at the store for three or four years making little more than the new minimum wage. It is not fair to have new employees earn just $1 less per hour than established employees, he said.

Labor costs amount to about half of the hardware store's total expenses. Soldotna Trustworthy's labor costs currently are 10 percent of the store's net profit before taxes; this means every $1,000 in sales cost him $100 in labor. If labor costs increase to 12 percent, Miller said he has two choices: Either his net profits will go down -- possibly forcing him out of business -- or he'll have to raise prices.

"It is a tight balancing act just to stay in business anymore," he said.

Although workers might welcome the raise, Paul Miller said the impact on business owners cannot be ignored.

"Everyone is going to pay 2 or 3 percent more," he said. "There are so many facets people don't think about."

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