Human Capital & Careers

Who’s Afraid of a Higher Minimum Wage?

Several companies tell how they would be affected (if at all).
Jennifer Caplan and Ed ZwirnNovember 9, 2000

Congress is once again on the verge of presenting a minimum wage increase to the President, and, not surprisingly, some business interests are up in arms.

H.R. 2614, which also contains $245 billion in tax cuts See earlier story on tax bill would raise the minimum wage by $1, to $6.15 per hour, over a two-year period.

But the measure, slated for consideration soon by the lame duck legislature, should have limited impact.

The Congressional Budget Office estimates the total annual cost to the private sector to be $4 billion to $5 billion, the U.S. Chamber of Commerce says the measure should cost $23 billion over the next five years, and just about all agree that costs of the hike would vary significantly depending upon business sector, geography, and the age and qualifications of individual workers.

In fact, a sampling of businesses contacted by reveals impact assessments ranging from significant to none at all.

This can be clarified by taking a thumbnail sketch of the hourly employees currently at the bottom rung of the pay ladder in today’s burgeoning U.S. labor market.

According to Bureau of Labor Statistics (BLS) figures compiled at the end of 1999, nearly 10.1 million employees age 16 and older, or about 14 percent of those paid by the hour, earn anywhere from $5.15 to $6.14 per hour.

Not surprisingly, these employees tend to be young. In fact, more than half, or 5.3 million, are under 25.

In addition, the BLS estimates that just over half of all low-wage workers are employed in the retail trade, while most of the rest work in either the service sector or in agriculture.

The impact of the hike would also vary by region, with the West having the fewest employees affected and the South having the greatest.

Impact Incremental

Although results vary greatly by sector, none of the firms contacted by were able to point to more than an incremental impact of a possible minimum wage hike.

And, again, none of the firms projected that they would be forced to grant raises to a majority of their payroll. Indicative of both a stagnant minimum wage (there has been no increase since 1996-1997) and a tight labor market, many said they had no employees in the affected range and anticipated little or no impact to non-payroll costs such as suppliers.

The Domino Effect

Domino’s Pizza has 20,000 “entry-level team members” slinging pies for minimum wage, according to Tim McIntyre, executive vice president of corporate communications.

McIntyre, like others in the fast-food industry, is concerned about the impact of the wage increases both to his firm and to the broader economy.

“The impact to our company is estimated to be in the millions of dollars,” he says, adding that “with 80 percent of Domino’s outlets in the hands of individual franchisees, the hike would have a devastating effect,” creating pressure on profit margins and operational capacity.

McIntyre claims that if H.R. 2614 is passed, the pizza giant’s first reaction would be neither to increase prices nor to lay off workers, but rather to determine parts of the business that could be run more efficiently. “Because our business relies so heavily on the people that make and deliver pizzas, laying workers off is not a good option for us,” says McIntyre.

But push may come to shove all the same.

“There is a price ceiling at which people will no longer buy a pizza,” he says. “Companies must strike a balance between passing off labor costs in price increases while retaining customers.”

Richard Valade, executive vice president and CFO of Schlotzsky’s, a specialty sandwich chain, based in Austin, Tex., predicts a more nuanced effect on his firm and the 1,000 employees working at the head office and 29 company-owned outlets.

“With the tightness of the labor market, there are not that many people we are employing at the minimum wage,” he says.

“What this does do is raise the entire pay scale,” he adds. “If someone’s making one dollar more than the minimum wage they’re going to want to keep making a dollar more than the minimum wage.”

But Valade is short on specifics when it comes to either the dollar impact of this effect, as well as the impact to other, non-payroll costs such as suppliers.

“It would perhaps have some impact although the labor component of our supply costs is much smaller than the materials side,” he argues.

Retailers’ Responses Mixed

Although retail is said to have a large number of low-wage employees in general, the specifics show a more complicated picture. The pattern that emerges shows the impact of a minimum wage hike as proportional to the snob value of the merchandise being offered.

An official at L.L. Bean, the upscale catalog retailer, said that the firm has no employees at, or near, minimum wage and anticipates no cost increases whatsoever from the bill’s passage.

Costco Wholesale, a “club” that enables members to buy “wholesale,” also expects to incur no additional costs as a result of the bill because all of the firm’s 70,000 employees “make well above minimum wage,” according to CFO Richard Galanti.

Twenty percent of Costco employees earn an entry-level wage of $10 an hour. According to Galanti, Costco grants its employees eight-to- nine wage increases over the first three years of employment, and the company strives to provide employees with the opportunity to move up the wage scale rather quickly.

Galanti asserts that Costco prides itself on paying employees competitive wages, and that the company “strongly supports a higher minimum wage.”

A bit farther down the wage scale lies Office Depot. The Delray Beach, Fla.-based office supplier employs about 41,000 people.

Charles Brown, senior vice president and corporate controller, predicts no direct payroll cost increases, assuming passage of H.R. 2614, because all of the firm’s entry- level employees earn about $7.30 an hour, a figure he thinks is far enough above the minimum wage to shelter the firm from the cost of a hike.

Then there’s Kmart Corp., the discount retailer, which has about 275,000 employees.

According to Mary Lorenz, director of corporate media, passage of H.R. 2614 would cost Kmart $90 million in the first year, a figure that could have some impact on prices at the register.

“As a low-cost retailer, we try to keep expenses low,” she says.

Call Out the Guards!

Wackenhut Corp., which employs some 40,000 security guards, is among the most affected and the least concerned of the firms contacted by

While only 2 percent of these guards are making exactly the minimum wage, the figure rises to about 10 percent when one counts everybody in the $5.15 to $6.14 range.

Beyond that comes what Patrick Cannan, Wackenhut director of corporate relations, calls the “ripple effect.”

The term has been used by critics of a minimum wage hike to describe the tendency of all workers to receive a wage hike whenever the lowest among them get raised.

According to Cannan, this effect is a matter of written procedure at his firm, especially at the lower pay levels.

An average Wackenhut guard brings in $9.76 an hour. If the minimum wage were to rise by $1, a guard making $6.25 an hour would get an hourly raise of $1.50 while one already making $6.50 an hour would get a $1.40 hike.

Beyond that lie the “$9, $10 and $11 an hour guys, guys who are veterans of elite military forces or those with a two-year degree in criminology, in which case we may start them as high as twice the minimum wage,” adds Cannan.

All would share to some degree the windfall to be reaped should H.R. 2614 become law, he notes.

“The closer you are to where the pebble falls, the greater the effect,” he says.

Despite this, Cannan says that not only is Wackenhut not worried about a minimum wage hike, but it actually stands to benefit from it.

The reason? “We more or less work on contract,” he says. Rather than agonize over a minimum wage hike or contemplate layoffs, Wackenhut “would go to the client and ask for increases… we expect them to be understanding.”

In any case, the pay hike would only cause revenues to increase, because the firm’s “margins are based on a percentage of the payroll.”

“That’s what separates us from the hamburger outlets on this issue,” he adds.