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As Minimum Wages Rise, Smaller Firms Get Squeezed

Posted by ehayden on June 22, 2015

An Indianapolis hot-dog business cites staffing costs in decision to revise expansion plans.

The article below was originally featured in the June 11 online edition of the Wall Street Journal.

Hannah Joseph dreams of bringing gourmet grilled hot dogs to food lovers coast to coast. But she now rules out owning any new restaurants beyond the two she and her husband currently operate in Indianapolis.

The reason: high staffing costs, and growing competition for low-wage workers.

“I don’t want to deal with more employees,” said Ms. Joseph, co-owner of King David Dogs, whose 10 or so staffers start at $7.50 an hour, 25 cents above the federal minimum.

In May, U.S. small businesses paid their workers roughly $16.36 an hour, according to seasonally adjusted payroll data from some 250,000 businesses with fewer than 20 workers, compiled by Intuit Inc. That is up about 2.2% from a year ago.

In comparison, U.S. companies of all sizes paid workers in nonsupervisory positions an average of $24.87 an hour last month, up 2.3% from a year ago, according to the Bureau of Labor Statistics.

State and city lawmakers’ recent push for higher minimum wages is poised to raise pay for the bottom fifth percentile, for workers at both big and small businesses, according to economist Susan Woodward, of Sand Hill Econometrics, Menlo Park, Calif.

On Wednesday, the Los Angeles City Council voted to increase the city’s minimum wage to $15 an hour by 2020, from $9 an hour. Delaware’s state minimum wage increased to $8.25 per hour June 1, from $7.75 per hour.

Some big employers such as Target Corp. and Wal-Mart Stores Inc. announced this year they would start pay at $9 an hour, and McDonald’sCorp. said it would raise starting hourly pay by $1 above the local minimum at company-owned restaurants.

“People can’t work for the minimum wage and afford to pay rent, in any state,” said Raina J. Johnson of Milwaukee. The mother of a 5-year-old left her job at Starbucks in January, where she said she was making less than $8 an hour, to work as a freelance writer and blogger.

“I have student loan debts, but I don’t even want to think about paying them off because I have to think about keeping a roof over my head,” she said. “The minimum wage should be enough so people can actually live, and not be so stressed out and depressed about how to pay their bills.” A Starbucks spokesperson said that no employee currently starts below $8 an hour, but she could neither confirm nor deny what Ms. Johnson was earning in January.

The shift to an economic recovery period following the 2007-2009 recession has made workers scarcer. “We finally reached the point in the business cycle where companies have great difficulty hiring workers at the minimum wage,” said Ethan Harris, co-head of global economic research at Bank of America Merrill Lynch. “We’ve had a total focus on cost-cutting instead of motivating and retaining workers.”

U.S. employers added 280,000 jobs in May, according to the U.S. Department of Labor, the 56th consecutive month of job gains, which is the longest streak on record.

Small-business owners were evenly split in their opinion of raising minimum wages, according to a May survey of 728 small firms by The Wall Street Journal and Vistage International. Forty-nine percent of respondents said the federal minimum of $7.25 an hour should be raised, while another 49% disagreed.

Dillon Edwards, who founded Brooklyn-based roaster Parlor Coffee in 2012, said entry-level positions, usually those dedicated to bagging coffee beans, start at $4 above the New York state minimum of $8.75 an hour. “It should definitely be more than that,” said Mr. Edwards, who has eight employees. “The cost of living is just so much higher. It needs to be at least in the double digits.”

If initiatives like the $15-an-hour one that passed in Los Angeles were to be approved in New York, Mr. Edwards said he would “be happy to pay” that amount, though it may require a ceiling on the pay of some of the higher-paid workers. “We know that it would ultimately reward our business and reward our community.”

Many other owners of small firms already pay above the minimums to attract or keep the entry-level workers they need. Yet some owners say raising wages even further is out of the question, because there is a ripple effect that comes with increasing pay at the lowest levels.

For instance, Beth Fahey, co-owner of a custom-cake maker in a Chicago suburb, said her cashiers start out at $9 an hour, 75 cents above the state minimum, “just to stay competitive.”

Ms. Fahey, whose Creative Cakes has 34 employees and recently opened a cafe, said she offers full-time employees paid time off but couldn't afford raising pay even more, especially for lower-wage workers.

“If you raise the minimum wage on people who are doing data entry or washing dishes, what does that mean to my skilled employees who are only making a few dollars more?” said Ms. Fahey. “I can’t raise everybody. If I do, the price of a doughnut is going to be $3 and nobody’s going to buy it.”

To cope with the wage hikes, some owners are rethinking their business models and how they allocate staff, in an effort to keep payroll costs low.

For example, in Los Angeles County, Dudley De Zonia, the founder and president of 180-employee Royal Truck Body, said he is considering moving some manufacturing work to branch locations in order to sidestep the expected increase in the minimum wage to $15. “Over the next few years, the minimum wage will be one of the biggest issues we face,” he said. The company manufactures work trucks for tradesmen and utility businesses.

The company has 100,000 square feet of manufacturing space in Paramount, Calif., and another 68,000 square feet in branch locations in Northern California and Texas. “We’ve already started moving stuff around,” said Mr. De Zonia. “It certainly makes it more affordable.”

While only a handful of entry-level employees at Royal Truck Body earn the minimum wage, about 80% of its staff makes under $15 an hour, he said. Because of that, he expects wages to rise about 30% by 2020, when the $15 minimum-wage hike will take effect.

Mr. De Zonia said he doesn’t take issue with an increased minimum wage, but he says the disparity in state minimums—makes it difficult for his business to compete on a level playing field. “I’ve got competitors in the Midwest who pay their workers $7.50 an hour,” he said.

In Indiana, the minimum wage has been $7.25 since it was last raised in July 2009. A bill that would have imposed a $10.10-an-hour minimum failed to pass in the Indiana legislature this year.

King David Dogs in Indianapolis currently generates about $250,000 a year. “We’re barely making a profit as it is,” said its founder Ms. Joseph, noting that she works outside the business as a lawyer to support herself and her family.

She and her husband once hoped to open 10 King David restaurants. But in light of potentially higher staffing costs, and challenges recruiting low-wage workers, their new plan is to sell King David Dogs products directly to grocery stores, or convert their business into a franchise operation.

Either approach would make it possible for them to expand the reach of King David without adding staff.

“We financially can’t” raise wages “without passing it on to our customers,” Ms. Joseph said. “There is only so much people are willing to pay for a hot dog. It’s not like we’re serving a foie gras burger.”

By Leslie Josephs and Adam Janofsky
June 11, 2015 4:23 p.m. ET