President Biden’s proposal to increase the federal minimum wage to $15 per hour from $7.25 (Biden Proposes $15 Minimum Wage | Kiplinger) has been a hot subject of discussion early in 2021 among entrepreneurs, corporate executives, trade associations, and at IBA with sellers and buyers. IBA, as an organization that advocates for, establishes market values of, and facilitates transactions involving the sale and purchase of privately held companies and family owned businesses emphasizing knowledge, experience, and “best practices” has done a comprehensive assessment of this potential economically impacting legislative action.
The following are some of the findings of our analysis:
- The change would have a less detrimental impact on small businesses in Washington and Oregon than those in Alaska and Idaho in the region we serve as business brokers. The current minimum wage in Washington is $13.69, the third highest in the United States. Minimum wage rates are already higher than $15 per hour in Seattle and SeaTac. Washington minimum wage will increase in 2021 | The Olympian The minimum wage in Oregon will increase to $12 – $14 depending on geographic location in the state on July 1, 2021, BOLI : Minimum wage increase schedule : For Workers : State of Oregon. Small businesses in Alaska, presently at a minimum wage rate of $10.34, and Idaho, at the federal minimum of $7.25, would be forced to burden 45 – 107% increases in labor costs associated with their least experienced and skilled employees.
- The wage increase whether 9% in areas outside of Seattle & SeaTac in Washington, 7 – 20% in Oregon in the immediate future, or higher rates Alaska and Idaho would reduce profitability for small businesses, and result in the need to give commensurate raises to employees being compensated up to $25 per hour to normalize pay structures recognizing experience, seniority, and skill.
As an example of the impact on business profitability and market value consider a small teriyaki business currently represented for sale in IBA’s hospitality division as a gesture of support for a referral partner. The business presently generates annual revenues of approximately $550,000 with non-ownership labor expense of about 25% comprised of a workforce at or near the present minimum wage rate, 20% cost of goods, 7% occupancy costs, and 20% miscellaneous operating expense. This family business currently generates in excess of $150,000 a year for ownership. An income almost three times greater than the average wage in America of $51,916,27 and over four times greater than the median wage of $34,248.45. Wage Statistics for 2019 (ssa.gov) Judging by almost any metric, the owner of this business is an American success story of entrepreneurship providing a quality standard of living to their family. IBA is honored in its small business transaction division to represent entrepreneurs, many of them first generation immigrants, at this level in the sale of their businesses. This business is presently on the market at a price of $275,000. Now consider the impact on the profitability of this business and its market value, if the minimum wage is increased to $15 in Washington, the state that would experience the mildest adjustment based on action by Congress in Washington DC. Present ownership paid approximately $140,000 for support labor. A 9% increase in this number would increase payroll expense by $12,600 to $156,000. This increase would result in an 8.4% reduction of income for ownership, but the damage to the entrepreneur does not stop there because the owner is seeking to retire. The increased minimum wage would also result in a likely reduction in business value of $30,000 – $40,000 or 11 – 15% of the previous value of the business before the federal mandated sea level change in employee compensation. A similar analysis can be conducted for businesses in Oregon, Alaska, Idaho, or anywhere else in the United States.
- Federal minimum wage requirements are a blunt instrument that do not take into account the differences in cost of living between different geographic areas of the nation. A more intelligent strategy for setting minimum wage rates is to delegate it, as has been done since the last change in the federal minimum wage in 2009, to state legislatures. This federalist strategy in line with the intent of the United States Constitution has resulted in common sense solutions like the $12 – $14 range in minimum wage that exists in Oregon where the lower rate is applicable to rural sections of the state and the increased rate to urban areas where a higher cost of living exists for the residents. The following article provides a good overview of the cost of living in the Pacific Northwest by geographic location. Regional Guide – The Northwest Cost of Living Breakdown (allied.com)
- Wage inflation was already occurring across the United States prior to the COVID-19 pandemic by natural economic forces. Examples are prevalent and include the 7.8% growth in median weekly earnings in both the Hispanic & Black communities between 2017 – 2019. Hispanic full-time wage and salary workers in the U.S.: weekly earnings 1979-2019 | Statista • African American full-time wage and salary workers – weekly earnings U.S. 1979-2019 | Statista It should also be noted that unemployment in January 2021 fell to the lowest rate since before the pandemic started. January is traditionally a poor employment month with the loss of seasonal jobs from the holiday season. It is anticipated with increased vaccinations and more normal engagement with society that demand for retail, service, and hospitality jobs will increase throughout 2021 continuing to reduce the out of work labor force. In addition, even while still experiencing COVID-19 related concerns and issues companies like Costco are offering entry wages well above the current federal minimum wage and above the federal minimum wage proposed by the Biden administration. Costco To Raise Minimum Wage To $16 An Hour : NPR
- The industry sectors most impacted by COVID-19 have been retail, hospitality, and leisure. Many businesses in these industries have closed and will not reopen. Many more are struggling for survival. It is more important for these businesses to survive, offer employment opportunities, and collect taxes for municipalities, states, and the federal government than to force them to burden increased operating costs in the form of higher entry and unskilled wages. These industries combined employed over 32 million Americans in 2019. Employment by major industry sector : U.S. Bureau of Labor Statistics (bls.gov) The survival of small and large businesses in hospitality, retail, and leisure is critical in the reestablishment of local employment opportunities and quality of life.
- The higher the cost of labor the increased motivation to seek technological solutions to provide services. Ask yourself which is better for lower skilled and younger aged workers to order food by touch screen or to have someone personally take your order at the service counter. A breakeven point exists where businesses make the capital investment to build infrastructure and replace people with machines. If the goal is a higher percentage of society with jobs is a higher minimum wage creating an environment for higher or lower employment by the younger and less skilled members of society, the last people employed in most societies. S. Lost Over 60 Million Jobs—Now Robots, Tech And Artificial Intelligence Will Take Millions More (forbes.com)
- Higher minimum wages hurt the ethnic communities, lower educated population, and the special needs population most significantly in terms of created employment opportunities. As the brother of a special needs individual, I personally recognize the value in terms of quality of life created through employment opportunities for members of society with mental & physical disabilities. The following video by economist Walter E. Williams, supports this premise: Walter E Williams – The Effects Of Minimum Wage – Bing video
It is our goal at IBA to provide information to facilitate intelligent decisions. We, as a firm do not sell or purchase companies, we advise parties on available options and allow them to decide what is in their best interest. We have taken the same approach with the proposed federal minimum wage increase currently being debated in Congress in the provision of additional information for consideration. We encourage citizens to share their views on the subject of minimum wage with their elected representatives, so their position is known in our legislative process which is “government for and by the people”. If you, as an entrepreneur, would like to discuss the potential impact of a change of the minimum wage on your business and its market value, we would welcome the opportunity to have that conversation.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, accounting, legal, wealth advisory, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.