OPINION: Minimum-wage hike: Boneheaded policy that will hurt many

OPINION: Minimum-wage hike: Boneheaded policy that will hurt many



Everyone knows that the state legislature passed a law increasing the minimum wage in Connecticut to $15 per hour to be phased in between October 2019 and 2023. The rate will increase by about 9% from $10.10 to $11 per hour effective October 1, 2019. Republican legislators had warned that the increase in minimum wage would make Connecticut even more unappealing to businesses and could backfire by reducing jobs and increasing prices. The first proof of the negative impact is now evident in the announced closing of a ShopRite grocery store in West Hartford.

According to a story  on We-Ha, an online site covering West Hartford, a Connecticut supermarket will be closing in late November amid a “challenging business climate.”

“After nearly a decade of serving the West Hartford community, ShopRite has decided it will close its doors,” said a Wakefern Food Corp. spokesman, quoted in the story. “In spite of our competitive pricing, large assortment of foods and products and excellent service provided by our dedicated associates, we have struggled to make the store profitable. A challenging business climate impacted by rising costs, regulations and the new minimum wage increase led to the difficult decision to close our doors on November 26.”

How will the store closing impact the community?

First, 134 jobs will be lost, i.e., the increase in the minimum wage won’t benefit a single employee at this store. They’ll have to find another job working for someone else, if they can.

Second, the store provided competitively priced high-quality goods and was conveniently located so the community will be losing convenience, quality and competitively priced groceries. A local resident, Petra Clark-Dufner was quoted as saying, “It’s a tremendous loss, especially to the community here, where you look at access to quality food for Hartford as well as West Hartford”. 

Finally, ShopRite stores are operated as a cooperative owned by members who are owners of their own businesses. This means the store was a local family-operated business. So, another mom-and-pop business has been hurt by the new minimum-wage law. 

These disastrous results were foreseeable but that didn’t stop the Democrat governor and Democrat-controlled legislature from barging ahead with this policy that was ill-advised, particularly in light of Connecticut’s weak economy and unfriendly business environment.

If the Democrats had read a recent Harvard Business School Study, they might have reconsidered their destructive minimum-wage policy.

“Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit”, a Harvard Business School working paper, studied the impact of minimum wage increases on restaurants in the San Francisco Bay area. The Study reveals several interesting and important findings regarding the impact of minimum wage policy on the 35,227 restaurants in the study.

First, the study found that “a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit (i.e., a business closing) for restaurants with median ratings on Yelp. That means one in every seven average restaurants will close because of a $1 minimum-wage increase. But the study also points out that the probability of closing is increased by 22% for all restaurants. This is because the lower-priced, lower-quality food restaurants (that is the so-called “fast food” restaurants) are disproportionately affected.

The study explains “the average profit margin of a restaurant ranges from 2 to 5 percent” and a 10% increase in the minimum wage will reduce profits by close to 2%. This “shock to the costs incurred by a business” means many profitable restaurants will no longer be profitable.

By 2023 the minimum wage in Connecticut is scheduled to increase nearly 50% from today. If a $1/hour increase can potentially increase restaurant failures by 14%, imagine what a $5/hour increase will do! The ShopRite closing is only the first “shock wave” of what may be a Tsunami of small business closings in Connecticut in the next four years.

The study notes the high-priced restaurants can pass the increase on to customers but the lower priced fast food restaurants frequently can’t pass on the cost increase so they must find efficiencies or go out of business. So, the wealthy are barely affected but the poor suffer lost jobs, more expensive food and fewer options.

Ironically, the cheaper fast-food restaurants disproportionately employ lower-income people and serve lower-income customers. So, the very people intended to benefit from an increased minimum wage are those more likely to suffer disproportionately.

The study also pointed out another impact that is often overlooked. The study states, “higher minimum wages deter entry”. Restaurants that might have been opened will never be opened because the higher costs make businesses less profitable and investment in them more risky.

Finally, the study observed, “higher minimum wages can help larger or more productive firms, and lead to fewer small or less productive firms” – in other words, the “mom-and-pop” establishments are more likely to suffer while big corporate-run operations are less affected by the impact of minimum wage increases.

The legislature continues to lead the way to economic ruin for Connecticut.

Len Suzio is a former state senator.

 

 


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