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Just Another Cost of Doing Business

General Business News

August 2007

Just Another Cost of Doing Business

Was July 24th the ‘beginning of the end’ of many employers - or even the end of low inflation, as numerous business lobbyists would have us believe? Was the first increase to the federal Minimum Wage in nearly a decade truly the harbinger of economic disaster, as some pundits would have us believe?

Your guess is as good as ours, but there is one certainty – on July 24, 2007, the federal Minimum Wage increased from $5.15 to $5.85 per hour - and that’s not all. The change is part of a two-year plan to increase the wage from $5.15 per hour to $7.25 – a total of 41%. In Summer 2008, the Minimum Wage will increase to $6.55 on its way to a final $7.25 in Summer 2009.

The history of the Minimum Wage’s ups and downs since 1955 is an interesting one. The height of its purchasing power was in 1968, when the (then) $1.60 minimum would purchase what $7.21 in 2007 dollars will purchase now. Perhaps that’s where the $7.25 came from.

To be sure, this increase will impact some employers drastically. Those employers with younger workers that are predominantly paid the Minimum Wage will see their payroll skyrocket. Fast food restaurants and similarly situated companies are among this group.

According to the Economic Policy Institute, an estimated 13 million workers will benefit from the increase in the Minimum Wage. Of this number, 5.6 million who earn less than $7.25 per hour will benefit directly - and the remainder will benefit from the “spillover effects” of the increase. This means that only about 4% of the workforce will be directly affected by the increase.

The actual affect on your business will depend on many things. First and foremost is your current wage structure. If all of your employees are paid greater than $7.25 per hour now, you may see some upward pressure on wages, but you should not expect to see a tremendous one.

A second significant consideration is where your business is located. Some states already have minimum wage laws that mandate higher pay. For example, Hawaii now requires a $7.25 minimum hourly wage and Alaska requires $7.15 per hour. Arizona mandates a minimum wage rate of $6.75 (that is adjusted annually using a cost of living formula). In fact, over half of state laws mandate higher minimum wages.

The full effect of the increase in the Minimum Wage on our economy is yet to be determined. Seemingly momentous changes in economic policy sometimes have minor negative effects on an economy, while seemingly minor changes can be catastrophic. To illustrate: in the 1970s, the Armed Forces Television in South Korea beamed only a black and white signal. At the same time, you could buy many goods in the Korean economy for far less than half what you would pay in the United States. Then, Armed Services Television upgraded to a color signal. What was thought to affect only military personnel caused a rush on color televisions in South Korea. This caused a rapid increase in prices and, two years later, prices on many items had nearly doubled.

While the wisdom and true economic impact of increasing the Federal Minimum Wage is yet to be seen, if you have Minimum Wage employees, the impact on your bottom line is already being felt. Take a moment to be sure you meet the new requirements and, more importantly, that you have adjusted the price of your products and services where you can. As always, we stand ready to help when you need us.

Have a great August!
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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