A Higher Minimum Wage Won’t Bankrupt Businesses, But Low Wages Will

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Growing income inequality means fewer Americans have the purchasing power required to support a consumer-based economy.

A common refrain from the right is that government interference via setting a base wage constitutes unnecessary and harmful meddling, in the end hurting the very people it intends to help.

But do available data bear out this purported fact? While the situation is complex, it is untrue that raising the minimum wage necessarily leads to poor economic outcomes - particularly job losses.

Contrary to popular economic theory, leaving the working class with less money in its pockets works to undermine business on the whole, as consumers have less money to spend.

Take for example the current climate of fast food businesses in the United States.

A few weeks ago, about 900 Subway franchisees sent a letter to the parent company protesting the return of the popular “$5 Footlong” promotion. Subway’s corporate executives set menu prices nationwide; franchisees handle day-to-day operations at more than 10,000 locations. Sales have dropped nearly 25% at Subway over the last five years, and management believes the $5 deal is the only way to show investors a reversal of fortune. The franchisees disagree. They wrote that such cheap sandwiches, which barely cover costs, will leave their businesses “unprofitable and even insolvent.”

“The reality in fast food now is that you need a value menu to survive,” market researcher Malcolm Knapp told the Washington Post.

Low-end restaurants aren’t the only ones cutting prices to reel in customers. One of the fastest-growing retail chains in America is Dollar General, which pursues the country’s poorest regions for store growth. Target lowered prices on thousands of items in September.

Why? Because too many Americans need less expensive options. Fast food might already be considered cheap and inexpensive, but it isn't cheap enough for such a large number of people whose wages have stagnated.

In other words, too many Americans lack the purchasing power necessary to keep many types of businesses profitable.

This suggests that purchasing power at the low end of the economy has become so corroded that sellers must fall over themselves to offer prices that barely enable them to make a profit. Whether the franchisees survive is secondary; investors demand companies chase the only growth area for non-luxury goods — the dirt-cheap end of the spectrum.

That’s a result of low wages. Americans did not receive raises from 2007 to 2014, and even that aggregate statistic doesn’t tell the whole story. Wall Street investors encourage companies to cut labor costs; record profits have resulted, with more national income going to the ownership class.

Most of the gains since the recession have come at the high end. While low-wage workers are finally seeing some boosts — mostly from minimum wage increaseslack of housing affordability and cost of living rises in areas like health care continue to put them behind.

At the end of the day, higher wages not only benefit workers but businesses as well. A consumer-based economy requires a sufficient supply of consumers.

The fact that so many can only afford to shop at severely discounted stores indicates that they don’t make enough money. This fact not only reflects a tragedy for workers, but for businesses, which must sell items practically at cost to generate sales volume.
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Tighter employment markets should take care of this wage conundrum, but only in the areas with the lowest unemployment. Everywhere else, living wages could have a salutary effect, pushing companies out of this race to the bottom on prices and ending the threat of insolvency.

Wage floors won’t bankrupt businesses, but low wages might.

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