Minimum Rage
Congress looks likely to raise the minimum wage, which used to guarantee an outcry from small-business owners. But they're strangely quiet this time.
By Cait Murphy

(FORTUNE Small Business) – Every year or three in Washington, partisans battle over the minimum wage in a contest as stylized as sumo wrestling and no less ferocious. Democrats traditionally argue that lifting the wage floor will help boost working families out of poverty. Republicans, backed by most small-business owners, protest that a higher minimum wage forces employers to raise prices, lay off workers, substitute machinery and software for labor, and outsource more work to China and India. The last big battle took place in 2001. That year the two sides fought to an exhausted standstill. The wage remained stuck at $5.15 an hour, as it had after Congress debated the issue in 2000—and in 1998.

The issue is back before Congress, but this time the mood is weirdly different. Leaders on both sides believe the wage floor is likely to rise by at least $1 over the next two years; an agreement is expected sometime this month. The bigger surprise is that the debate is proceeding, in Congress and around the country, with little of the flushed-face shouting of recent years. Susan Eckerly, who heads the National Federation of Independent Business's lobbying efforts in the Senate, observes that while the group's 600,000-strong membership doesn't want the minimum wage increased—82% opposed it in a recent poll—this year it is "not a to-the-barricades issue." In a recent NFIB report, "Small Business Problems & Priorities," the minimum wage ranked just 57th in a list of 75 top concerns. Even President Bush steered clear of the minimum wage in a speech at a small-business summit, where his biggest applause line was "You cannot be pro--small business and pro--trial lawyer at the same time." The proposed wage hike is also eliciting yawns in much of the heartland: "I don't think small business is going to rise up," says Fred Bobich, who owns a small resort and is the incoming chair of the Minnesota Chamber of Commerce. Says Mark Berson, director of the Alabama Gulf Coast Area Chamber of Commerce: "I haven't heard a word" about the issue from local proprietors.

What's going on here? Small-business owners around the country and their champions in Washington explain that while they still despise the idea of an increase in the minimum wage, these days they have more urgent concerns, led by soaring costs for health insurance, liability insurance, and energy. Under the most generous proposal before Congress, the wage would rise to $7 over two years—which would amount to less than 4% a year since the last wage hike. Compare that with small business's health-insurance costs, which rose 15.5% from 2002 to 2003. Energy costs are up about 15% over the past 12 months.

One reason a minimum-wage increase is expected to pass is that Republicans plan to attach the increase to a bill granting new tax breaks to small business. Another reason is that the last wage hike came in 1996, and in much of the country there are few $5.15-an-hour jobs left, because of either tight labor markets or local regulations that mandate higher starting pay. (Twelve states currently have wage floors higher than the Federal minimum.) Labor advocates point out that a full-time worker at the minimum wage grosses less than $11,000 a year, below the poverty line for a two-person household. Since the last increase, the buying power of that wage has eroded to a third of average earnings, the lowest level ever.

Some economists argue that a higher minimum wage costs few jobs in the service industries, where the wage is prevalent and where employers can pass higher costs along to customers. But on the front lines, many business owners fear the higher wage will also cut into profits and employee benefits. John Davis, who owns a coffee shop called Java Joe's in Carson City, Nev., says that half of his 14 employees make less than $7 an hour. A minimum-wage increase to $7 will cost him at least an extra $1,200 a month in labor costs. "That comes out of my pocket," he notes glumly. His answer: A cup at Java Joe's will go from $1.35 to $1.50 or more. It's a similar story at the Hampton at Post Oak, a Houston retirement facility. About half of the 200-plus workforce makes the minimum wage or a bit more, says marketing director Karen Mawyer. If the increase goes through, the company's short-term response will be to raise rents. After that, the company will start eyeing employee benefits. Not hiring isn't an option, she notes: "In our business, we have to have humans."

Even proponents of the minimum-wage hike agree that it is a blunt instrument: Much of the added pay will go not to the working poor but to the children of prosperous families. Clearly, a better approach to address family poverty is to expand the Earned Income Tax Credit, which returns to the working poor a portion of the regressive federal payroll taxes that they pay. But in Washington, any boost to the EITC can be portrayed as "deficit spending." Most pols prefer to take the credit for a minimum-wage hike and let small-business owners pick up the tab.