The Ripple Effect of Minimum Wage Ordinances

img_3876-1On Thursday, April 14th, groups of labor protesters walked the city streets of Chicago. Their demand: raise the minimum wage to $15 per hour. Protests like these continue to impact the trends of City and State minimum wage increases across the country.

So, how do the growing demands of groups like these impact small businesses, customers and job seekers alike?

Let’s take a look.

First, here is a quick breakdown of three recently passed minimum wage ordinances: the City of Chicago, the State of California, and three different ordinances throughout the State of New York.

Chicago:
Effective Date

Non-Tipped Employees

Tipped Employees
Current $10.00 $5.45
1-Jul-16 $10.50 $5.95
1-Jul-17 $11.00 Increases with CPI
1-Jul-18 $12.00 Increases with CPI
1-Jul-19 $13.00 Increases with CPI
1-Jul-20 Increases with Consumer Price Index (CPI) Increases with CPI
California:
Effective Date

26 or More Employees
25 or Fewer Employees
1-Jan-17 $10.50 $10.00 (current rate)
1-Jan-18 $11.00 $10.50
1-Jan-19 $12.00 $11.00
1-Jan-20 $13.00 $12.00
1-Jan-21 $14.00 $13.00
1-Jan-22 $15.00 $14.00
1-Jan-23 $15.00 $15.00
New York City: Effective Date
11 or More Employees

10 or Fewer
31-Dec-16 $11.00 $10.50
31-Dec-17 $13.00 $12.00
31-Dec-18 $15.00 $13.50
NY Employers in Nassau, Suffolk and Westchester Counties: Effective Date
31-Dec-16 $10.00
31-Dec-17 $11.00
31-Dec-18 $12.00
31-Dec-19 $13.00
31-Dec-20 $14.00
31-Dec-21 $15.00
NY Employers in remaining part of State:
Effective Date
31-Dec-16 $9.70
31-Dec-17 $10.40
31-Dec-18 $11.10
31-Dec-19 $11.80
31-Dec-20 $12.50
1-Jan-21 Rate will increase to $15.00 on an indexed schedule to be set by the Director of the Division of Budget (DOB) in consultation with the Department of Labor.

 

It is probably too early to say who will be impacted the most by such legislation. A growing concern for small-businesses located outside of the City of Chicago may be whether they can afford to compensate employees to compete with the Chicago market, especially as the minimum wage continues to increase. On the opposite end of the spectrum, small businesses, within the city limits of Chicago, may find themselves asking whether they can afford to continue operations in the city. This in turn, may drive businesses to consider relocating jobs.

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Last summer, one of my clients provided feedback they had received from reputable employment agencies, Pro Staff and AIG: there was a shortage of available seasonal workers. They attributed this shortage to employees that were not as willing to work for wages below Chicago’s $10 per hour minimum wage.

That leaves us with the question:

“Will people be willing to work for a lower minimum wage in surrounding areas, whether that be Chicago’s suburbs, or in the surrounding states of California and New York, knowing that they may be able to find employment nearby for a higher wage?”

If suburban companies continue to see a decline in available workers, how will those companies respond …Increase their labor costs? Offer employees other forms of compensation? Raise price of goods?

HiringI would be remiss not to mention the arguments behind these recent minimum wage increases. One primary argument is that this addresses the cost-of-living increases; Chicago city officials estimate that more than 400,000 Chicago workers will benefit for this reason alone. In addition, proponents for raising the federal minimum wage argue it would increase economic activity, reduce poverty as well as government welfare spending, and spur job growth.

Economists from the Federal Reserve Bank of Chicago predicted that a $1.75 rise in the federal minimum wage would increase aggregate household spending by $48 billion the following year, thus boosting GDP and leading to job growth; however, such labor increases may end up of having the opposite effect on workers and job seekers, as job-creation may begin to halt.

In certain industries, they already have.

According to an article posted on Investor’s Business Daily, recent Labor Department data shows that job creation is actually on the decline, at its slowest pace in at least five years, specifically in the leisure and hospitality sector. Chicago had their slowest year of job growth in the leisure and hospitality sector since 2009. Employment gains from October through December of 2015 averaged less than half the pace seen in 2014 at just 1.1 percent. In addition, increasing labor costs may drive businesses to increase their prices, if they wish to continue to seek profits, which in turn may negatively impact the consumer. Specifically in the fast-food industry, the Federal Reserve Bank of Chicago stated that if minimum wage is increased, fast-food restaurants would pass almost 100% of their increased labor costs on to consumers.

There’s no doubt that the increase of minimum wage will create a ripple effect felt by customers, job seekers, and employers.

Employers, particularly small-businesses located in areas near Chicago, California and New York, should begin analyzing whether to compensate their employees to match the local minimum wage hikes, especially if the trend of “employees not-as-willing to work for a lower wage” heightens and leads employees to migrate to companies and or locations that will.