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As minimum wage rises, small businesses feel pinch

Thu., Jan. 4, 2007

NEW YORK — The new year brought an instant jump in labor costs for thousands of small business owners in states across the country whose minimum wages went up as of Jan. 1. But they’re not the only owners affected by the increases — even those paying above the minimum say they’re under pressure to raise their employees’ pay.

The increases in some states were fairly steep — in Arizona, for example, the minimum wage is now $6.75 an hour, up from $5.15, which is the current federal minimum. In New York, the minimum is now $7.15, up from $6.75. Smaller increases have gone into effect in other states, and some states still plan increases later this year.

Moreover, some cities have also raised their minimums even where there’s been no statewide increase. And employers might be seeing an increase at the federal level this year — the Democrats who now control Congress have said they’re making a priority of raising the nation’s minimum wage.

Many small businesses pay well above the minimum, but retailers and fast-food restaurants who in particular depend on young, entry-level workers often pay the minimum, and so they stand to be hit hard by the change. Yet companies whose workers are paid above the minimum are also being affected, and businesses who hope to hire minimum wage earners in the future are also having to factor in higher labor costs.

In Michigan, the minimum will be rising 20 cents to $7.15 an hour from $6.95 on July 1, and it’s also scheduled to rise another 25 cents to $7.40 a year after that. Tim Shepherd, owner of TWC Surf and Sport in Keego Harbor, Mich., said the increase means some of his store’s workers, who tend to range from 16 to 22 years old, will have to work fewer hours.

“Our budget stays the same,” Shepherd said. “It’s definitely going to pinch us a bit — we may have less people working.”

Shepherd said the employees who will be affected perform what are known as back-room jobs, rather than those who work directly with customers. “We’re never going to be able to pull those guys off the floor,” he said of his sales staff.

Part of the problem that Shepherd and other retailers in the state face is uncertainty due to job cuts and buyouts in the auto industry — it’s difficult to pass higher labor costs on to customers. “We’re on a roller-coaster ride now in Michigan with the economy so bad,” he said.

Joe Fontana, who owns a Detroit-based corrugated packaging company, said, “I don’t think it affects us immediately, but there’s be some trickling effect in the future.”

Fontana, CEO of Michigan Box Co., said most of his employees are already earning above the minimum, but with the state-mandated wage rising, “now they expect more.”

He’s also concerned that the increase might affect future expansion plans — for example, if he needs a new assembly line, the kind of work that Fontana would pay the minimum wage for. “That’s going to affect our product costs. … You have to ask yourself, ‘Can you still do this, or do you need to farm it out to Mexico now?”’

Fontana said he relies on temporary agencies for some workers, and those costs are likely to go up too.

Joe Schodowski already expects to be hurt by Michigan’s increase. His Auburn Hills-based online company,, is opening its first traditional store.

The higher wage “is really going to put pressure on me,” he said. “I”m going to have to raise my sales expectations to cover the overhead.”

Like Fontana, he’s expecting his current employees to ask for a raise too. When workers see other employees getting more, “somebody that’s making $10 an hour thinks, ‘I should be making $12 an hour. … They want to be made whole again.”

The employers don’t begrudge workers the added pay. As Schodowski put it, “everyone needs to make a wage.” But he’s still concerned about the health of his business in a difficult local economy.

“It’s going to be tougher and tougher for manufacturers to compete,” he said.


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