In recent years I’ve heard of many companies claiming that raising wages will force them to shut down stores, or close up shop altogether. I’m not talking about small mom and pop businesses, but larger chains like Rubios, Starbucks, Target, Kohl’s, etc.
Is this true, or are companies just trying to protect their profits? Would large companies really go out of business if they needed to pay each of their employees $5-$10 more per hour? Is there any economic data to back this up or dispute it?
Would Raising Wages Actually Force Businesses to Close?
byu/SisuSisuEveryday inbusiness
Posted by SisuSisuEveryday
14 Comments
Just think about all the chains that have gone bankrupt over the past few years and I think you will get your answer
It’s all bullshit.
Publicly traded companies have shareholder dividends to consider, so they’d just raise prices to recoup margin. Higher prices would create opportunity for smaller companies to compete.
If you’re operating on such razor thin margins that a meaningful 5k a year increase in salary for your lowest earners means you cannot continue to operate, you’re over leveraged and should close.
It would force them to raise prices. I don’t know a single business that keeps people it doesn’t need.
There are companies where the margins are too thin to raise wages. Some will fail if they are forced to raise wages, but basically all medium to large companies can do it. The problem is that then they can’t pay the leaders incredibly high wages.
No companies would adjust. Those that are more efficient win those that can’t make it close down. Consumers move to the ones than win, or new layers enter the market with less baggage.
“It depends” is the short version.
Raising wages will probably lead to raising prices, in order to maintain a consistent profit margin. This will probably lead to reduced sales, because if a company could have had raised prices to maximize revenue they would have already.
Whether that leads to them closing after that depends on a lot of factors. What could happen is that certain products then become unsustainable to manage , so they drop them or get lower cost equivalents.
Small businesses may well close, large businesses may shutter a few of the least profitable locations but it would really just raise prices.
Yes.
Businesses are just trying to protect their profits and there are definitely businesses that would close.
Overall employment doesn’t go down, however. What we see repeatedly is that the mix of employers and employees changes. We don’t actually understand why this happens because it flies in the face of economic theory. Some proposed mechanisms:
1. Labor market inefficiency. One thing that definitely happens is new, more desirable workers enter the labor force. It appears that large numbers of people don’t know the prevailing wage or maybe don’t understand it. Either way, it seems like businesses replace less productive workers with more productive ones.
2. Income effects. Workers who make more money also lose more money when they lose their jobs, show up late, and so on. The incentive to work and be productive rises and this effect may actually be huge.
3. Monopsony. At the lowest end of the wage structure, there may actually be very few employers exercising monopsony power. The minimum wage itself may actually play a coordinating role in it. (Think of it as the employer side of the first effect!) So, minimum wage rises may act as a pure transfer from rent-seekers to workers.
4. Pure accounting identity. My personal favorite! What we know from economics is that workers are paid their marginal product and not a penny more. This is expressed as an equation, not a causal relationship, so raising the minimum wage raises the minimum marginal product and thereby offsets the expense! QED, as they say.
The idea that raising wages alone will cause large companies like Starbucks, Target, or Kohl’s to go out of business isn’t supported by economic data. These are multinational chains with millions in revenue, diversified business lines, and management teams that plan for cost changes. A few extra dollars per hour per employee, while meaningful at the payroll level, is usually not an existential cost shock for a company that size. Ironically, these are the loudest businesses on this issue, not those that would actually go out of business (SMEs).
it’s all connected in the economy so the answer is complex. in an ideal environment wages would increase if the business is going well and the business is able to share its success with its employees and shareholders alike.
when you raise wages through a minimum wage increase, aka a mandatory increase, which has no connection to the overall health of the business, you’re putting a lot of strain on small businesses, where most of their operating costs relate to staffing (hiring, training, insurance). if the business can’t handle that increase in cost (and a lot of small businesses are running on razor thin margins) then they have to lay off people.
those laid off people have less money to buy things and the overall economy goes down. that puts strain on larger businesses that are relying on economies of scale (lots of people buying their stuff). if even a small margin of people being laid off from small businesses can’t buy the stuff the big companies are making they have to start laying off people too. because paying shareholders are making the stock number go up is more important (and the legal obligation of the company) than keeping people on staff. and staffing is often still the easiest thing to cut en mass and train up if needed (or eventually replace with automation)
Why raise wages when there is somebody ready to take what they pay?
Not corporations, no. Not even the few remaining mom and pop places either.
For some. The real issue is that the more you pay workers, the less profit there is for owners and investors. Businesses can’t start without someone putting up money (resources). If it’s not profitable enough, eventually, they chose to put their money in other places. It’s actually the same concept that drives wages. If you’re not paying employees enough (profit), people invest their time (resources) in another employer who pays more.
The only way to increase profit is to cut costs (often wages), or increase price.
Well, think of it this way; in other developed countries they have American fast food outlets where they pay their workers survivability wages…. And the punchline? That Happy meal cost about the same as it would in the US adjusted for currency 🎊