Does a Minimum Wage Hurt Businesses?

THERE ARE plenty of countries around the globe that have introduce the minimum wage. At its heart is the desire to protect low paid workers and provide them with enough money to live on. Some countries like the UK make the distinction between the minimum wage and the ‘living wage’.

There’s no doubt, however, that adopting the minimum wage is presenting problems for industries such as the restaurant business. It has economic as well as human resource consequences.

Some businesses say increases have reduced the number of people that they can employ, pushing them inevitably towards new technology to protect that all-important bottom line. Nowhere has the argument over the minimum wage been as hotly contested as in America where it’s recently bubbled to the top of the business agenda.

The Case for the Minimum Wage

There’s always been a difficult balancing act between the needs of employees and the profits of the employer. The minimum wage was originally introduced in the US in 1938. Today, there are some 3.5 million people working on hourly rates who are either paid the minimum amount or lower. There was plenty of heated debate when it was proposed to raise the rate to $15 in 2014. While large corporations like MacDonald’s would be able to absorb the cost, reasoned the objectors, smaller businesses would find it a lot more difficult. Many might even go to the wall.

There’s plenty of merit in giving people a minimum wage – we all need to live and being paid a fair amount for a decent day’s work is everyone’s right. It also stops some businesses taking advantage of their workers. The trouble is there are also some stark economics involved which can have a huge impact on businesses.

The Case Against the Minimum Wage

Essentially, once you increase the price of something the demand begins to fall. A restaurant may have 10 staff but once their labour costs more they will have to reduce employment to maintain their bottom line. It’s a good sector to check the impact of the minimum wage because a large proportion of low paid workers are in the restaurant industry.

Of course, if the economy is heading up and we’re all prospering, the impact on employment may not happen at all. Tables in restaurant get filled and business booms. Everyone’s happy.

The trouble is these have been fairly difficult times, particularly after the financial crash in 2008 and particularly for the hospitality industry.

In areas like San Francisco and Seattle, the introduction of the minimum wage has indeed seen an increase in restaurants going to the wall. This has naturally affected more of those operating already on fine margins, the two, three or four starred establishments. For higher starred restaurants this has had much less of an impact as you might expect.

According to Forbes:

“A rising minimum wage means that a larger number of businesses using lots of minimum wage labour go bust and or decide to exit the market. It's really extraordinarily difficult to get from that to the idea that there will be no unemployment effect from a higher minimum wage.”

Other objections to the increase in minimum wage include that it tends to be fairly arbitrary. What counts as a viable wage for one industry may not for another. Different regions also have different economies. In England, minimum wage is hiked a little when you get into London, for example, where the living costs are much higher. The problem with this is that the cost of running a business is also that much higher in the City. Minimum wage policies can also disproportionately impact on certain communities such as black Africans or Hispanics in the US.

What objectors to the minimum wage say is that it worsens the living standards of a wide range of people and also puts businesses under pressure which means that they either have to change their business model or, increasingly in recent times, find technological solutions to their operating problems.

The Role of New Technology

You can’t blame a business for trying out new technology to streamline their operational procedures. There is some suggestion, however, that the rise in the minimum wage has hastened the adoption of new tech to improve things and even replace people.

The South China Morning Post highlights a restaurant in Happy Valley that allows their customers to order food via an iPad rather than from a waiter or waitress. The introduction of easy to use technology here allows the business to employ a lot fewer staff on the minimum wage and, in the process, boost profits. While this may well happen naturally in any restaurant, there’s a sense that it’s speeding up because of the increased wage bill many employers are facing.

With so many of us carrying around smartphones and tablets, it’s easy to foresee a time when people book a restaurant place online, head in and get themselves seated and then order from their mobile phone. Restaurants, however, are not the only businesses introducing tech to cut down on staff. Manufacturing has been doing it for years.

While this is obviously great for the businesses themselves, it doesn’t solve the problem of employing people and giving them a living. According to research, in the USA alone there are around 74 million people who are being paid an hourly rate, of which 4.7% are on the minimum wage. Raising the minimum wage is obviously going to impact on the bottom line of many businesses and introducing it has certainly led sectors and industries to explore different possibilities such as smart technology.

While advocates say that we all deserve a decent standard of living, the knock on effect of putting up wages arbitrarily in areas like the US have been quite predictable. The question remains whether wages should be market driven or determined by legislation and it’s not an easy one to answer.

For the moment, the argument in the US and other countries continues, with neither side willing to change their point of view. The stats, however, do tell us that employment is likely to decrease the more you raise the minimum wage and that, in turn, will push businesses to look more closely at automation sooner rather than later.