Some Inconvenient Truths about Raising the Minimum Wage

I still remember my first real job. I was 15 years old and applied for a job to scoop ice cream at a Baskin Robbins franchise that was getting set to open. Fred Gehring, the owner of the franchise, had leveraged everything he had including his mortgage to be able to open this store. Scoops of ice cream were 14 cents. My pay was $1.10 per hour. I thought I had died and gone to heaven.

I think about Fred and my job at Baskin Robbins a lot whenever I hear talk about raising the minimum wage as Proposition 206 will do on the November ballot. I think about what the cost of that scoop of ice cream would have been if Fred had been required to increase his labor cost by 25% as Proposition 206 will do if passed. I wonder how many more hours Fred would have had to work because he would have hired fewer young guys like me. I wonder if I would have been one of the eager and willing young guys Fred would have cut from his payroll to keep his costs down. Franchises operate on very stringent financial restrictions in order to be successful. I also remember the tremendous soft skills Fred taught me like how to greet and serve customers, how to count change back to a customer and how to make the entire store sparkle after the door was locked and we had cleaned the floor, cabinets and seating area.

I used the money I made at Baskin Robbins to save for my college education, go out on some dates and even to buy a car that was one step away from heading to the crusher. I didn’t make a career out of scooping ice cream, but it was a great introduction to the real world of work, responsibility and reward for honest effort.

If you follow the money, Prop 206 is a Big Labor- sponsored initiative that essentially says to the voter, “Wouldn’t you like to see people make more money?” Well heck yeah! Who could be against people making more money? The measure is cloaked in the guise of promoting income equality and moving people off of the welfare rolls. But there are some inconvenient truths about Prop 206 we all should be aware of.

Employers are resourceful. If the government forces them to increase their labor costs by 25 percent they will react to keep their costs in line. Positions will be cut. Automation will replace what people used to do. Hours will be reduced. Businesses will move or close altogether. As one business owner put it, “The wage of someone who suddenly finds himself unemployed is zero.”

For the record, here is how Arizona stacks up against surrounding states in minimum wage levels:

Federal $7.25

Arizona $8.05 (Prop 206 would boost that to $10.00 in 2017)

California $9.00

Nevada $8.25 without insurance
$7.25 with insurance

New Mexico $7.50

Utah $7.25

This is not the kind of picture that will make Arizona more competitive in the future.

Seattle was among the first of the west coast cities to adopt a $15 minimum wage. KIRO-TV in Seattle reports that workers are doing the math and requesting fewer hours so they can earn more per hour yet remain below the earning threshold for keeping their welfare benefits. So much for income inequality and lifting people out of poverty.

In Seattle some restaurant owners are tacking on surcharges to cover higher wages. Others are encouraging customers not to tip. Remember, employers are resourceful. Indeed, Paul Guppy of the Washington Policy Center says, “It’s what happens when the government imposes a restriction on the labor market that normally wouldn’t be there. Marginal businesses get hit the hardest, and usually those are small, neighborhood businesses.” Not the kind of news a small business wants to hear, especially when competition from online retailers is pinching profits even more.

A Wall Street Journal article by Andy Puzder in February of this year that was headlined Killing the Working Class at Wal-Mart states, “The evidence continues to roll in: Broad increases in the minimum age destroy jobs and hurt the working-class Americans that they are supposed to help.” He cites the planned closing of 150 U.S. Wal-Mart stores that will leave 10,000 people looking for work. Even the Congressional Budget Office has data showing that minimum wage increases reduce employment.

Sixty-five percent of all minimum wage earners work part-time at entry level jobs. Many of those jobs provide the worker with tips and many more are second paychecks in the family. Many who earn minimum wage are students (like I was) who are looking to climb onto the first rung of the ladder of success and upward mobility. Even those who start on the first rung making the minimum are almost always provided with merit increases after 90 days…not because the state said so but because they actually earned it with their performance.

There are other problems with Prop 206. Language in the proposition allows local communities to enact their own minimum wage laws. Imagine a patchwork of minimum wage amounts across Arizona and the resulting movement of businesses from one jurisdiction to another and the effects such moves will have on local employment opportunities.

And finally, let’s remember that everything we buy has a price point above which the consumer will not pay. How much will you really pay for a cup of Starbucks coffee? 25 percent more…or brew your own? A Big Mac? Maybe a sandwich made at home is now a better bargain for lunch. Once labor costs increase the cost of those items enough the consumer will simply not pay. And you can imagine what happens then.

The Tucson Metro Chamber urges you and your employees to vote “NO” on Prop 206 in the upcoming election.

Sincerely,

Michael V. Varney
President & CEO