PERSPECTIVE-Most people I know, including many in the Neighborhood Council system, would support an increase to the minimum wage.
But $13.25 or $15.00 per hour?
No.
They, as I, realize it is not quite what the politicians make it out to be.
Increasing the minimum wage that dramatically will not be the beginning of the end to poverty, much less the end.
The effect will not be uniform; there will be winners and losers for both employers and employees. This will be very evident on the extremes – large firms who do not rely heavily on unskilled or low-skill labor will most likely absorb the additional costs with little effect on margins and employment.
Small businesses with modest margins will certainly reduce staff or perhaps go out of business. Not a good prospect for anyone.
Even those businesses who can handle the increased costs may gradually alter their hiring criteria. At $13 to $15 they will expect employees who can add to productivity, are flexible and have potential to advance and handle more complex duties. You may find some college grads who have heretofore been underemployed taking jobs they would have otherwise ignored, thereby displacing the most unskilled workers.
The effects will vary considerably by company and industry, but it is a certainty that a measurable number of unskilled workers will join the ranks of the unemployed.
The big question is the twilight zone of employers who will be able to cover most of the additional costs, but will not be able to remain as competitive. Fast food franchises come to mind, but any small business will face a challenge. Some will not have the option to raise prices, or even if they did, the increase will be limited by market forces.
In effect, we will see zombie firms staggering through an apocalypse of near failure – one that will ultimately lead to their final demise as sure as a bullet in the brain kills the undead in The Walking Dead.
One of the ways a profitable firm can meet its end is by technical default on its bank loans.
Lower margins can cause a company to miss making certain key financial ratios as required under lending covenants – this is an example of a common technical default.
Several years ago, I spent many months modeling debt workout scenarios for troubled fast food franchises whose profit margins were declining due to a problem with suppliers. Working closely with the franchisor, our team was able to formulate viable solutions for most franchises, but there was a cost. The least profitable locations were eliminated (along with the respective jobs), losses would usually result on the sale of stores or select assets. Everyone took cuts in pay. More restrictions were placed on the owners.
Refinancing terms would stretch payments out over a longer term, improving cash flow, but making the prospects for future expansion more difficult.
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The alternatives were not good. Failure to eliminate the technical defaults would almost always lead to the dissolution of the franchise … and there were those beyond any form of assistance.
So, while some minimum wage employees will enjoy a better life, many will have trouble scraping up money to buy a higher-priced burger and will be edged out of the employment market by more qualified candidates.
(Paul Hatfield is a CPA and former NC Valley Village board member and treasurer. He blogs at Village to Village and contributes to CityWatch. He can be reached at: [email protected])
–cw
CityWatch
Vol 12 Issue 74
Pub: Sep 12, 2014