The forgotten man of the minimum-wage debate

Doug Altner Analyst, Ayn Rand Institute
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President Obama has renewed his call for Congress to raise the minimum wage to at least $9 per hour. Advocates claim that raising the minimum wage helps low-wage workers. Opponents point out that if Congress makes it illegal to hire an employee for less than $9 per hour, there will be fewer job opportunities for those who lack skills and experience.

Most minimum-wage debates focus on these arguments — how the minimum wage affects low-wage workers. What’s rarely discussed is how it affects business people, especially start-up entrepreneurs.

Suppose a stay-at-home mom — let’s call her Susan — wants to open a bakery to make a business out of the pies and cakes that have been winning praise for as long as she can remember. To open her bakery, Susan must take enormous financial risks — paying upfront to hire and train staff, buying industrial baking equipment, decorating her store — costs that likely entail taking on a lot of debt.

She will succeed if she can make enough money to cover not only her operating costs but also her initial costs. That, however, is no cake walk as one out of two new business ventures fails in its first five years. Susan will have to work like a dog, knowing that if her business fails, she may lose her home if that’s what it takes to pay back her lenders.

One strategy Susan can take to keep her costs low is to hire some teenagers at $7.50 per hour to help work the cash register, haul supplies, and assist bakers. She prefers to hire several employees who are only looking for temporary work, because she cannot afford to commit to too many permanent employees until she has a steady customer base. And there’s no shortage of teenagers who are happy to work for a small wage for some work experience and extra spending money. For both sides, it’s a win/win trade.

Raising the minimum wage to $9 per hour would make Susan’s business strategy illegal.

Trying to launch a new business is difficult enough without the government passing laws preventing business owners from hiring employees for wages they are willing to accept. Even raising the hourly minimum wage by $1.75 could cost an entrepreneur like Susan thousands of dollars per month.

Susan is fictional but her experience is typical. Holly Wade, a senior policy analyst at the National Federation of Independent Business — a group representing 350,000 entrepreneurs — opposes raising the minimum wage. “We’re hearing from our members that they want more flexibility to structure the workforce as they need to,” she says.

David Houston, who co-owns the Barney’s Beanery bar and restaurant chain in Los Angeles, explains that raising California’s minimum wage to $9.25 “would just squeeze the heck out of us” and that “it would effectively absorb about half of my profits.”

Melvin Sickler, a businessman who “went all in financially” to start his first Auntie Anne’s pretzel franchise, estimates that raising the minimum wage to $10 per hour could swallow nearly 60% of an average location’s income.

Should these businessmen cut employee hours, cancel plans for growth and expansion, or absorb the blow themselves?

The debate over raising the minimum wage is in part a debate over whether entrepreneurs should be forced to shoulder even greater burdens. By not seriously considering what the minimum wage demands from such business people, we are treating them not as human beings with rights, but as pack animals that must obediently carry whatever additional weight is piled on their backs. Their judgment, their career dreams, their lives — why don’t these matter?

People would be outraged if the rights of employees were trampled with such callous indifference. Where’s the outrage over the treatment of entrepreneurs?

Doug Altner is an analyst at the Ayn Rand Institute.