A $15 Minimum Wage May Do More Harm Than Good

One Seattle suburbanites' opinion on how a recently passed $15 minimum wage law may cause more harm than good to Seattle's economy and surrounding businesses.

Jun 7, 2014 at 8:32AM

Almost everything in life is based on perspective. Differing perspectives are the reason we have two political parties always at odds with one another, and why we see nightly debates on cable TV news networks over social and economic issues. However, varying perspectives are also what make this country so great, as everyone has the freedom to express his or her opinion.

Today I'm going to share a bit of my own personal perspective on the recently passed minimum wage law in Seattle. I worked for near-minimum wage for a period of my life, and now I earn enough to live comfortably. I'm also a resident of a city not too far north of Seattle. Therefore I have a deep understanding of the inner workings of the city and how this wage increase could affect local and global businesses, as well as the rest of the nation.

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Source: Joe Lustri, Flickr.

The city of Seattle sets a precedent
The new law, which was approved by a 9-0 vote by the Seattle City Council, will more than double the current federal minimum wage of $7.25 per hour to $15 per hour and will be phased in over a number of years, depending upon business size. Businesses with 500 or more employees will be required to phase this new wage in by 2017, or 2018 if they're offering health care to employees. Smaller businesses would have five to seven years to complete the phase-in.

This move is particularly notable given that Washington state already has the highest minimum wage in the country at $9.32 per hour and that a proposed federal increase in the minimum wage to $10.10 per hour has stalled in Congress with little traction. 

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Source: Yang Lee, Starbucks.

The benefits of a big pay raise
When I worked at my previous jobs, which paid just north of minimum wage, the prospect of a substantial increase in my pay sounded promising, if not downright awesome. The entire basis of the minimum wage increase is to put more money in the pockets of workers to increase their take-home pay and provide them with a wage they can actually live off of. Based on some crude calculations, once the $15-per-hour new law takes full effect, a full-time employee will be making about $31,000 per year before taxes. That's pretty close to three times the current federal poverty guidelines for a single-person family household in 2014 of $11,670. 

In addition to putting more money in the pockets of Seattle workers -- of whom an estimated 100,000 make less than $15 an hour now -- a higher wage could help boost morale. A happy worker is a more efficient worker, and this could lead to improved operating efficiency at businesses, as well as less worker turnover. If a worker is making the highest minimum wage in the country, he or she is likely to take pride in their job and fight hard to keep it, which helps with the cohesion of both small and large businesses and may ultimately trickle down to an improved consumer experience.

This law could do more harm than good
But as I said, everything is based on perspective.

I also see the other side of the argument and believe that drastically raising the minimum wage in such a short period of time (even five to seven years) could prove disastrous to the Seattle economy and large businesses such as Starbucks (NASDAQ:SBUX), McDonald's (NYSE:MCD), and Subway, which fill the streets in Seattle.

First, I'd suggest that with higher minimum wages comes the potential for higher-priced products. Local news station KING 5 in Seattle interviewed David Jones, a Subway franchise owner who would be among the first affected by the law shortly after its passing. Jones noted that he would need to boost his footlong prices by $0.75 (in some cases as much as 15%) just to keep up with the large minimum wage boost.

More importantly, though, Jones notes that this isn't just an increase in wage for workers who currently make less than $15 per hour. With management in many restaurants making around $15 an hour to perhaps a little more than $15 per hour, their wages will need to go up as well to match their job title and/or tenure with a company. Not to mention that the phase-in means bigger businesses like Starbucks, McDonald's, and Subway will need to boost their prices sooner than smaller businesses, which can keep their prices lower for years later while still meeting the wage phase-in requirements.

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Source: Dan Moyle, Flickr.

These wage increases mean more money in the pockets of some 100,000 Seattle workers, but it could come at the expense of millions of Seattleites and tourists who could be paying considerably more for practically every product and service within the city limits. It may also cost some workers their jobs, as some businesses may choose to sacrifice staff members over raising prices. With wages high, finding a job within the city could become increasingly difficult.

Secondly, think about how a large increase in the minimum wage could detract from bringing new business to Seattle. With the exception of a handful of sectors -- such as biotechnology, which relies on well-paid and specialized researchers and has a strong footing in Seattle, and retailers like Costco (NASDAQ:COST), which is known for its progressive pay policy and health care benefits for employees -- a higher wage, which leads to higher expenses, could dissuade businesses, both large and small, from opening up shop in Seattle. It may even dissuade business from opening up in Seattle's surrounding communities for fear that the $15 minimum wage could spread to other local communities. This could lead to a decline in competition and a reduction in innovation, which is bad for the consumer on both fronts.

Third -- and a lot of minimum wage workers in Washington state don't fully realize this now -- their benefits, such as free downtown parking, health care coverage, and so on, are included as part of their wage. So as real wages rise to $15 an hour, you could see businesses cutting back on the amount of perks offered to employees. If free downtown parking is eliminated, for example, it could cost area workers $10-$15 per day (trust me -- I've tried to park downtown, and you really won't find a spot much cheaper than this). In addition, large businesses may choose to simply drop workers below the 30-hour-per-week threshold as defined by the Affordable Care Act, removing any chance of paying a penalty for not offering and/or subsidizing full-time workers' health insurance. In other words, the benefits workers may gain in pay could be lost in the intangibles they're not currently factoring into their current pay.

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Source: Joe Monin, Flickr.

Here's the biggest concern of all
But there's an even greater concern as I see it. A $15 minimum wage completely removes workers' incentives to develop the skills needed to improve their socioeconomic outlook. The $15 minimum wage law (with exceptions for teenagers, who can be paid below the $15 minimum wage) acts as an instant reward to workers with fewer skills, reducing their desire to learn skills, which may be more desirable by businesses and may land them a better-paying job in the long run.

In a perfect world, wages are based on skill specialization, and in the majority of instances those who have put in the time to go to college or trade school and learn a specific set of skills should be paid more than those who haven't put in that effort. Of course, the world isn't perfect, but the minimum wage boost will only discourage the desire to obtain and grow workers' skills, which is ultimately bad for businesses.

You decide
The good news for both supporters and opponents of the $15 minimum wage is that the phase-in period could allow regulators to make adjustments as needed to hit a middle ground where workers can earn a living wage and businesses can successfully operate and innovate without having to pass along hefty price increases to consumers. With cheers coming from one side and lawsuits expected from big businesses, this isn't the last we'll hear about this law in Seattle -- or other cities for that matter.

What I do know is that drastically boosting the minimum wage probably won't work as the law currently stands. The benefits it could provide to workers in terms of higher pay and better work satisfaction will be more than canceled out by the lack of drive for workers to improve their skill set, potentially higher prices for products and services, and a dearth of business innovation as higher employee costs cause businesses of all sizes to shun Seattle and its outlying communities.

But that's just my perspective. What's yours?

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Costco and Starbucks. It also recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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