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Big Business: Higher Minimum Wage a Bad Idea

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President Obama recently made good on his State of the Union claim that he would raise the government employee hourly wage from $7.25 to $10.10 through executive order starting in 2015. 

Big businesses seem intent on making sure that hourly wage is raised only for government hourly workers. Citing a recent Congressional Budget Office report released, a new commercial is airing saying that "up to one million jobs will disappear" if any increases in the minimum wage are made. 

Such a push is not indicative of all big business; Gap  (NYSE: GPS  ) has already announced that it will raise the minimum pay for all employees to $9 an hour in June, and $10.10 an hour by 2015. Wal-Mart (NYSE: WMT  ) , though it lobbied heavily against raising the minimum wage last year, publicly stated that it will neither help nor hinder the current legislation as it had previously.

What's the gist of the bill?

While not word for word, the bill currently on the floor bears a remarkable resemblance to legislation introduced in March 2013 under the designation S.460. Under its provisions, the bill would raise the minimum wage to $9.15 an hour one year after its acceptance, $10.10 after two years, an amount set by the Secretary of Labor after three years, and then annually after that based on inflation.

The wording of the bill has caused a great deal of partisan comment but the proposal, if passed, will increase earnings for 16.5 million Americans in low-wage positions. With about half of these under the age of 25 and at best having a high school degree, the new pay system could lead to increased consumer spending while lifting nearly 1 million over the federal poverty line.

Proponents say that raising the minimum wage to $9 will offset between 10% and 20% of income inequality generated since 1980. With executive positions earning salaries that have historically never been higher, the justification could be made that low-wage earners deserve a similar boost.

Why fight the wage?

The wage increase will mean very little in the long term, say detractors. Many businesses fearful of a wage increase claim that the positive effect will do little besides increase labor costs to a point only big businesses can absorb. 

Big businesses are just as fearful it seems. Low margins will only get lower for some sectors of the market (see below); businesses are justifiably fearful that a wage increase could scare investors away from proven business models. Then again, this seems unlikely, given that the stock market has strengthened somewhat in the wake of previous wage increases (not by much, but increased all the same).

It is possible that businesses are afraid of the long-term prospects of a wage increase. Businesses facing slimmer margins will raise prices or cut costs. Either of these could lead to a downturn in consumption by the general public and a diminished market for current businesses.

And they will be hurt, says USNews opinion writer Keith Hall. In his words, "raising the cost of hiring the least skilled workers will prompt employers to reduce employee hours, cut back on staff, or replace employees with updated technology such as automated scanners." The common sense economic argument certainly resonates.

Which businesses are fighting it...

Let me reiterate: not all business is taking a position against the legislation. There are many companies that are adjusting wages and others that are staying out of the conversation entirely. 

Yet several big restaurant companies including Yum! Brands  (NYSE: YUM  ) , which own Taco Bell, KFC, and Pizza Hut, as well as Darden Restaurants  (NYSE: DRI  ) , owners of Olive Garden and Red Lobster, are fearful and working to minimize any adjustment of the minimum wage. While spokespersons for the companies remain silent, there are indications that the new commercial referenced above has ties to Employment Policies Institute.

The Institute, claiming that the commercial is "intended to provide a clearer representation of ... what some of the consequences are," has not revealed connections to business opponents of wage reform. Nor will they, but considering the firm is backed by the restaurant industry, the Institute's commercial is more than likely a response from an industry built on hourly wages.

Small business owners are also panicking, worried that wage increases will price them out of business to cover the advancing costs. Considering the 40% that the minimum wage would increase, this is an understandable concern for small-margin business like child care and some versions of retail.

Most businesses are frightened of increasing their own costs while not guaranteeing new streams of income. That being said, it is likely that companies will respond based on size; smaller, less fiscally nimble companies will continue to react fearfully while larger companies will react in a way that best suits sales. 

One thing is for sure: the bill is not going anywhere until mid-term elections happen. And that might be the best thing for businesses everywhere.

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Kurt Avard

A January 2014 addition to the Motley Fool team, Kurt Avard prefers to focus on the "dark" side of business and how it interacts with politics. Rarely writing on the same thing twice, he feels that, if he manages to convince you that the two are inexorably linked, he has adequately done his job. Follow him on Twitter @kurtsavard

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