Experts differ on effect of proposed wage hike
Feb. 11 , 2007
By JOSEPH M. DELEON News-Post Staff
jdeleon@fredericknewspost.com
FREDERICK — Greg Reed and his wife, owners of Fractured Prune Donut Shoppe, work hard to make sure their new business will be profitable.
To make the store a success, the Reeds watch expenses, balance payroll and plan to promote the store with coupons. Reed also serves customers, makes donuts, sweeps the floor and takes out the trash.
“You gotta do what it takes from the beginning,” he said last week. “But, business has been better than we expected, considering we haven't advertised.”
Reed often works more than 80 hours a week, waking up at 4:30 every morning to make sure the store is ready to serve donuts at 6 a.m., but customers often arrive as early as 5:15 a.m.
While the grand opening is not until Feb. 24, about seven workers have been serving up breakfast, coffee and the store's trademark hand-dipped donuts since Jan. 20.
With so much to do, the couple has not had time to think about how a proposed increase to the federal minimum wage might affect business.
Congress is considering an increase to the federal minimum wage from $5.15 an hour to $7.25 over the next two years.
Some experts agree the proposed increase will have little if any effect on Frederick County because Maryland's minimum hourly wage of $6.15 is already higher than the federal rate, and most entry-level workers in the city earn $7 or more.
Frederick County has about 90,000 workers, according to the state Department of Labor, Licensing and Regulation; they earn nearly $20 per hour, on average. But for renters, likely to be among the county's lower earners, the average hourly wage is $10.64, according to the National Low Income Housing Coalition.
Richard Griffin, director of economic development for Frederick, agrees the proposed increase will have a minor effect on Frederick County, but he is concerned some businesses might struggle to pay workers more.
“Most of the professional businesses are already paying significantly more than minimum wage,” he said. “Where you most likely will see the challenges is going to be more in the retail and service sector, where they do rely heavily on entry-level workers.”
The Fractured Prune is one such business — it pays its workers, all of whom are entry-level, $7 an hour. The Reeds polled workers at nearby businesses to determine how much to pay their employees. Since pay ranged from about $6.50 to $7.50 an hour, they settled on an average.
If the proposed increase passes, workers at the doughnut shop would have to earn at least $7.25 in 2008.
But Reed is not worried. After raises based on performance, many of his workers will earn more than that this year.
“I'm sure after three years, we'd have to pay more than that anyway,” he said. “We knew going in we'd pay more to attract good workers.”
Increase embraced
Some employers welcome the proposed increase, believing the higher wages might keep workers happy and the extra money they earn will trickle into the local economy.
Peter Plamondon Jr., whose family owns the Roy Rogers trademark, thinks the proposed increase will affect the family business, but is not sure how much.
Plamondon Enterprises owns 15 Roy Rogers restaurants, eight in Frederick County, and three hotels under the Marriott brand.
“There's no question in our business, a very high percent of costs are associated with labor, which affects everything from menu pricing to room rates,” Plamondon said. “It's going to affect us, but I couldn't put a number on it because it changes every day depending on who's on the pay roll.”
Having to pay more might alter the bottom line for the family business in Frederick County, but Plamondon thinks places such as Hagerstown and Cumberland will be hit harder.
That's because many employers there pay entry-level workers minimum wage.
Plamondon's company employs more than 600 workers, but almost none of them earn minimum wage.
“Frankly, we don't have many people at minimum wage because pay is so competitive (in Frederick),” he said. “And after 90 days, most workers will typically be out of the minimum wage range.”
Raises at Plamondon Enterprises are based in part on merit and vary with the job and location. Even so, the increased minimum wage might encourage some workers to stay and give them more money to spend on personal needs, such as housing and food, he said.
Plamondon thinks paying more than minimum wage encourages workers to stay longer. That translates into better service and money saved training new employees.
“Our approach in business is such that we like to have as little turnover as possible. That's where you get a higher expense — when you have to train,” he said. “To the extent you can minimize turnover, it certainly helps keep costs down.”
Plamondon's decision to pay workers more than minimum wage is common in Frederick County, said Mary Nagle, assistant director of Frederick County Workforce Services. Entry-level workers in the county rarely get paid less than $7 an hour.
About five years ago, many service employers in Frederick, such as Giant Eagle, McDonald's and Sheetz, started paying entrylevel workers better wages to attract the growing number of people who were trying to cope with a rapidly increasing cost of living.
“There was a sense, especially in the service industry, that employers couldn't attract workers, so some businesses raised their starting pay,” she said. “Soon, others followed. You'll be hard-pressed to find any that pay minimum wage.”
Increase skepticism
While Plamondon is ready to embrace the change, others are not so sure an increase will have many benefits. Increasing wages might mean paying more for goods and services or even more unemployment.
The hike would have a negative effect on nonprofit employers, such as Goodwill and Frederick County Workforce Services, which rely on grants and have no way to increase revenue by changing prices, like restaurants and stores.
“It could affect the number of Frederick County Workforce Services summer jobs,” Nagle said. “As the wage goes up, we would serve fewer people because of our limited budget.”
Every summer, the agency pays minimum wage to dozens of 14-to 21-year-olds who have trouble finding jobs. About 90 percent of the participants have a disability, but the program also serves students with financial hardships.
The agency offers other services for young adults and teens, which include job-search training, job fairs, job shadowing and softskills tutoring, such as interviewing, communication and decisionmaking skills.
With more money going toward increased pay, either fewer workers will be hired or fewer services will be offered, Nagle said.
Michelle Day, business services representative at the agency, thinks the proposed increase is more of a psychological ploy or political gesture aimed at making the working class believe the government is helping.
While the intention is to put more money is workers' pockets, the result could be far from that.
“Economists believe that might mean increased unemployment,” she said. “If you have to pay more, you might keep the highly skilled laborers and eliminate the lowwage earners.”
Some business owners and economists believe an increase would create another problem — higher prices.
If the government required Reed to pay workers significantly more, the price of a doughnut at Fractured Prune would go up. He thinks other businesses would also increase prices if wages rose.
“In my opinion it's cyclical; an employer isn't going to eat the cost of increased wages,” he said. “If employees get way more than minimum wage, employers will increase prices and workers will have to pay more anyway.”
Inflation is another problem, especially considering the federal minimum wage has not been raised since 1997. Minimum wage earners today make less than their counterparts in 1995, when they made $4.25.
The $5.15 some people make is the equivalent of only $3.95 in 1995, according to the Washington-based Economic Policy Institute, a nonpartisan think tank.
Anirban Basu, an economist who teaches at Towson University and heads the Sage Policy Group, thinks inflation will diminish the impact of the proposed hike over time.
“If history is any guide, it will be many years before another minimum wage increase takes place,” he wrote in an e-mail interview. “Paying a minimum wage distorts the market more than it improves market outcomes.”
Basu thinks teenagers looking for summer work and internships will see most of the benefits of the proposed increase.
Of the seven workers at Fractured Prune, six are teens who live at home and attend high school or recently graduated. When Reed asked his workers what they planned to spend their money on, most said toys, such as portable music players and video games.
The proposed increase could actually hurt the workers it is designed to help. Basu thinks lower wages help less-skilled workers compete with highly skilled workers.
Take the example of a skilled tailor who is able to make 10 garments a day. His coworker, who is less skilled, can only make five garments per day. The only way the less-skilled worker could compete with his counterpart would be to work for less than half the wages.
In this example, a minimum wage actually hurts the less-skilled worker because employers will not want to pay the same amount to someone who can produce less. Requiring both workers to earn the same wage makes the less-skilled worker's services too expensive and would likely force him into unemployment, Basu said.
“The best way to improve living standards is through education and training, and simply requiring higher wages risks job destruction,” Basu said. “If someone is willing to work for less, why should the government jeopardize a suitable job opportunity that would otherwise be available to them, but may be lost to them because of a minimum wage requirement?”