Businesses Stung by $15-an-Hour Pay

Small Businesses Discuss the Problems Posed by a Rising Minimum Wage

December 11, 2013 - Wall Street Journal

Mike Condon says his SeaTac, Wash., coffee shop won't have to comply with the new minimum wage but expects it to affect recruiting workers. Matthew Ryan Williams for The Wall Street Journal

With 40 employees and less than $5 million in annual revenue, the franchise hotel in SeaTac, Wash., could be the typical American small business. But the Holiday Inn Express will soon have to give most of its staff pay raises that are anything but routine.

Officials in SeaTac, which is 10 square miles nestled between Seattle and Tacoma and consists of an airport and its surroundings, confirmed this month that it will raise the minimum wage for many workers to $15 an hour starting in January. That's a 63% increase and the highest municipal minimum wage in the nation.

The original vote in November was so close that a recount had to be ordered.

SeaTac is an extreme example of the mounting labor costs facing employers nationwide, and it may serve as a controlled experiment on the impact of a significant wage hike in a small community.

Elsewhere in Washington state, employers already pay $9.19 an hour, the highest state minimum wage in the country, and that amount will rise 13 cents next month. In January, Oregon's hourly minimum will climb to $9.10, New York's to $8 and Vermont's to $8.73. Among municipalities, San Francisco currently has the highest minimum wage, at $10.55, which will increase to $10.74 next month.

Han Kim, a partner in the 171-room Holiday Inn Express franchise in SeaTac, as well as two other SeaTac hotels, estimates that for all three, the city's wage hike to $15 hourly will result in about $400,000 in additional labor expenses.

"We are running pretty thin as it is so we cannot eliminate positions," he says. Increasing the price of a room is too risky, he adds. "I cannot go around changing prices without my competition [also] changing them. . . . We'll have to make less money I guess."

Mr. Kim says he is putting plans to build a fourth hotel property in SeaTec on hold. "We are waiting to see how things are going to pan out," he says.

The issue is of particular concern for small employers, which often complain that they operate on thinner margins than their large counterparts. Some economists say a higher minimum wage prompts small firms to reduce workers' hours and scale back hiring, while others argue it improves employee retention and results in increased consumer spending.

President Barack Obama has backed raising the federal minimum to $10.10 an hour, from its current $7.25, by 2015. That proposal would raise the wages of about 30 million workers, who would receive more than $51 billion in additional pay over the phase-in period, according to a March report from the Economic Policy Institute.

Mike Condon says his SeaTac coffee shop won't be required to comply with the city's new $15-an-hour minimum, which applies only to hospitality and transportation workers and excludes airlines and small businesses with fewer than 25 employees.

But he expects the higher rate to make it harder for him to recruit and retain entry-level workers. "Employees of my own that are well trained can go over to these jobs at the airport now and make more money than I can possibly pay them," he says. "With our margins, I would not be able to match those salaries and stay in business."

Mr. Condon renegotiated his shop's annual lease in August so he could easily opt out in anticipation of the wage change. "I'm thinking of relocating," he says.

Most employers in SeaTac can't easily relocate. "We are left with no choice but to make the best of it," says Scott Ostrander, general manager of Cedar Brook Lodge, a boutique hotel in SeaTac with less than $10 million in annual revenue. Of its 117 employees, about 70% earn less than $15 an hour and will get automatic raises next year.

"We sit on 18 acres of naturally restored wetland. It's not like we can just pick up all 18 acres and move," he says.

About 28% of 599 small businesses across the U.S. with annual revenue of $1 million to $20 million said they support raising the federal minimum wage to $10.10 an hour, according to a survey this week by The Wall Street Journal and Vistage International; 65% were opposed and 7% selected "other."

"There are businesses that sell to low-wage earners, and so an increase in their income could translate into an increase in their business," says Richard Curtin, a research professor at the University of Michigan.

Last Thursday, fast-food workers launched protests in cities across the country, calling for higher pay and saying they can't survive on minimum-wage income. Melinda Topel, 42 years old, who makes the $7.35-an-hour minimum wage at a McDonald's franchise in Kansas City, Mo., recently went on strike seeking $15 an hour.

Asked whether a higher wage would cause her to lose hours or her job, she said: "I'm not afraid of that. McDonald's Corp. makes billions of dollars a year, thousands of dollars an hour. They can afford to pay us what we deserve."

If the minimum wage is raised, "it would help me where I can pay my rent and my utilities. I would be able to buy shoes for my kids for school, to buy clothes that they need for school, winter jackets. I wouldn't have to worry about whether or not my kids are cold, or if my lights are going to get turned off."

A McDonald's spokeswoman said via email that the company offers its employees competitive pay and benefits.

Rondell Johnson, 23, earns the minimum in Pennsylvania, $7.25 an hour, working as a baggage handler for airport subcontractor PrimeFlight at Philadelphia International Airport.

"It's a headache. You really can't do nothing. You work to pay bills," he says, adding that he would "move tomorrow" to a city like SeaTac because of the city's significantly higher starting-pay requirements. PrimeFlight declined to comment.

Gary Gerber, founder and owner of Sun Light & Power, in Berkeley, Calif., starts his entry-level workers at $15 an hour or more and believes that arguments against a higher minimum wage are "probably being greatly over-blown." He says: "What's going to happen is the raising of the wage will pump a bunch more money into the economy."

Mr. Gerber's company, which designs and installs solar-electric and solar-hot-water systems, has 65 employees and about $14 million in annual revenue. The minimum wage in California is $8 an hour, and it's slated to increase to $9 next July. "You're going to get better quality employees if you pay better," he says.

Frank and Sydne Albanese, co-owners of a small café in downtown Seattle since 2003, say that over the years they have come up with strategies for coping with minimum-wage increases.

For example, they maintain a "skeleton crew" of just five minimum-wage earners and keep their inventory as lean as possible. "Excess inventory just means dollars are sitting in your back room," says Mr. Albanese.

The business also rents out its space for private parties, he says. "You have to find every potential revenue channel that you can."

Write to Sarah E. Needleman at sarah.needleman@wsj.com and Daniel Lippman at daniel.lippman@wsj.com

Corrections & Amplifications
New York's minimum hourly wage will increase to $8 on Dec. 31 from $7.25. It will increase again to $8.75 in December 2014. A Marketplace article on Thursday about a new minimum wage adopted in SeaTac, Wash., incorrectly said New York's minimum will increase to $8.75 in January.