The bare minimum
Should Virginia raise the minimum wage, or let market forces dictate pay?

by Garry Kranz
for Virginia Business
February 2007

Businesses across Virginia are bracing for a change: the first possible increase in the state's minimum wage in a decade. At press time, the Democratic-controlled U.S. House of Representatives had voted to boost the federal minimum wage to $7.25 an hour - $2.10 more than minimum-wage workers in Virginia earn now.

If the measure is approved by the U.S. Senate and signed into law by the president, the federal minimum wage of $5.15 per hour would increase in three steps over 26 months. Since congressional action supersedes what state legislatures might do, Virginia legislators who support a wage hike are waiting to see what happens at the federal level. If there's a stall, four lawmakers plan to introduce bills during the current General Assembly session that would force Virginia employers to pay graduated increases of as much as $2 per hour during the next several years to minimum-wage earners.

The current effort continues a trend started during Virginia's 2006 legislative session. Three separate minimum-wage bills were filed; however none of them passed. Similar to the debate on the national level, Virginia's small-business owners - especially those in the retail and hospitality industries - say they could be the hardest hit.

Graeme Bisdee, owner of the Arrow Inn in Hampton, says he sympathizes with those struggling to make ends meet. Still, Bisdee would prefer politicians stay on the sidelines and allow market forces to dictate pay rates. "I'm the first to ask, 'How on Earth does a person survive on $5.15 an hour?' But most of the time it's the demand [for labor] that determines what I as an employer have to pay to get the best people.

"It's an employees' market," adds Bisdee, whose hotel employs 15 to 20 full-time staffers, who make an average of $7.50 to $8 an hour.

The Virginia proposals apparently are a hedge against a Congressional stalemate. "The impetus for needing state action is that there is still a chance that nothing will get done on this issue in Congress. Plus, given the slow pace of change in Washington, we think it's prudent to continue to look at doing something at the state level," says Jesse Ferguson, political director for House Democratic Caucus Chairman Del. Brian J. Moran of Alexandria.

Most notable of the Virginia bills is one drafted by Danville Republican Del. Daniel Marshall III, a small businessman who owns Marshall Concrete Products. Marshall filed his bill as a defense mechanism to prevent state lawmakers from overreaching in case Congress fails to act. "I think market forces should be allowed to work," says Marshall, "but if the mood in the [state] House and Senate changes, I wanted to have a bill on the table that businesses could swallow."

Marshall's bill is noteworthy for two reasons. First, it targets increases only to workers 19 and older, thus eliminating a broad swath of low-wage workers. Second, it is the only proposal that does not index minimum wage to inflation, thus safeguarding employers against the vicissitudes of the economy.

Exerting force on market forces
A government-mandated wage increase is a tough pill for Virginia's small-business leaders. While they have been resigned to the fait accomplit of Congress, many are disappointed that state lawmakers want to duplicate the effort. They worry it will harm Virginia's newly gained status as the best U.S. state for business, recently conferred by Forbes.com, the Web site for Forbes magazine. "For the sake of conformity, we argue that the federal government should set the rate for minimum wage, so Virginia doesn't get out of sync with neighboring states," says Keith Cheatham, vice president of government affairs for the Virginia Chamber of Commerce.

That is already happening, though. In recent years, neighboring states have upped their rates, taking action independent of Congress. For instance, workers in Maryland and Delaware earn at least $6.15 per hour, while companies in the District of Columbia are required to pay a minimum of $7 to their hourly employees. The tides are shifting even in traditionally conservative, business-friendly states such as North Carolina, whose legislature last summer ratified a measure to boost its state minimum wage to $6.15.

Yet those making the lowest wages aren't the only ones likely to expect a raise from their employers. People already earning above minimum often feel justified in asking for additional money when they see entry-level employees getting more, says Kirk Harris, a restaurateur who runs two Irish pubs in Virginia. "Nobody in the restaurant business in Virginia pays minimum wage anyway," says Harris, whose 40 full-time workers average between $9 and $10 per hour, excluding food servers, bartenders and others who work mostly for tips. "The ripple effect of this [increase] could just kill small businesses, especially in the restaurant business where margins already are so thin."

Even larger employers that can better absorb an increase are bracing for the impact. Food Lion LLC, a supermarket chain based in Salisbury, N.C., employs more than 19,000 Virginians, virtually all of whom earn higher pay than minimum wage. Once the floor is raised, though, the company expects to have to re-examine its pay schedules for all employees, said spokesman Jeff Lowrance.

Helping the poor?
If the federal Bureau of Labor Statistics (BLS) is to be believed, the raging debate doesn't appear to merit all the bluster and rhetoric being generated - especially in Virginia, where about 60,000 people make at or below the federally mandated hourly minimum of $5.15. That represents 3.4 percent of Virginia's total hourly work force of 1.75 million people.

The most common argument for raising minimum wage - that it directly benefits the working poor - also is dubious, says Jill Jenkins, a chief economist with the Employment Policies Institute, a research group in Washington, D.C. Based on a federal minimum wage increase to $7.25, Jenkins said, 41 percent of those affected in Virginia would be young people living at home with a parent or other relative - not primary wage earners who are heads of households.

Moreover, there potentially are other unintended consequences, such as employers shifting more costs for health care and benefits to employees to outright loss of low-level jobs. Companies also tend to cut back on training and development, thus hampering the ability of younger workers to gain needed job skills. "Increasing the minimum wage does substantial harm to the very people it is intended to help," says Jenkins.

Supporters don't buy that argument, noting how earnings have stagnated since minimum wage was last increased by Congress a decade ago. "There are no other states [neighboring] Virginia that have not raised their [state] minimum wage. We're one of the last states to move forward on this in the region," notes Ferguson.

Looming over the debate is how President Bush will handle federal legislation. Last month, the Bush White House said it opposed the hike passed by the House, because it didn't include any relief measures for small businesses. The U.S. Senate has indicated that it would be open to amending legislation to protect small businesses from big increases in labor costs.

One way or another, Virginia's low-wage workers appear poised to receive a pay raise as soon as next summer. Whether the sugar daddy is the federal or state government is undoubtedly irrelevant to those most in need.