Will a $15 minimum wage be a boom for business or a bust?

The pizza is made with choice local ingredients and hand-pressed dough. It is baked by workers who receive health insurance and other benefits on top of an hourly wage of $11 to $12 decent by industry standards. Matt Galvin, president of Pagliacci Pizza, says those are the ingredients that go into the award-winning pizzas produced by his 450 employees at Pagliaccis two dozen outlets in Seattle and on the Eastside.

Throw in another local component an increase in the Seattle minimum wage, from $9.32 to $15, which labor advocates are demanding and Galvin is not sure what the future holds. All but six of his firms 24 pizza places are in Seattle, and he says such a dramatic wage increase would force him to raise the price of his pizzas, making it hard for him to compete against the national chains. Everything we do is handmade in Seattle, Galvin says. Some competitors are shipping in from places like Iowa, so their product costs are lower.

Additional Toppings. Matt Galvin, co-owner of Pagliacci Pizza, worries about the impact a $15 minimum wage will have on his Seattle-based business.

Pagliacci Pizza is one of thousands of businesses in Seattle anxious about the future as the Seattle City Council debates passage of an ordinance that would increase the minimum wage. At the $15-an-hour rate Mayor Ed Murray has publicly supported, Seattles minimum wage would be 107 percent higher than the federal minimum wage, 41 percent higher than the city of San Franciscos and 61 percent higher than the rest of Washington state, where the minimum wage will continue to be $9.32 an hour, the highest state minimum in the country.

We know something is going to hit us in the teeth, says Doug Glant, who owns Pacific Fabrics, a chain of seven fabric stores, and Pacific Iron and Metal Co., a metal recycler. We just dont know how many teeth well lose. He says a $15 minimum wage could force him to close some of his stores and might kill the fabric company.

Proponents, by contrast, argue that a $15 minimum wage will help lift thousands of Seattleites out of poverty while also adding much-needed spending to the economy. In a capitalist system, Seattle entrepreneur Nick Hanauer, a venture capitalist specializing in early-stage startups, wrote recently on the opinion website BloombergView, rising inequality creates a death spiral of falling demand that ultimately takes everyone down.

Not coincidentally, a special 24-member panel advising Mayor Murray on the issue is called the Income Inequality Advisory Committee. It was tasked with delivering a recommendation to the mayor by the end of April, after this issue went to press. The City Council could vote on an ordinance to raise wages as early as May.

David Freiboth, executive secretary of the M.L. King County Labor Council and a member of the advisory committee, says $15 an hour makes sense because its the amount workers need to be self-sufficient in todays economy.

Freiboth is confident the City Council will pass a law that achieves labors goal. But there remain disagreements about whether a wage increase should be phased in over two to five years and whether health care benefits, tips and other compensation should be counted as part of a $15-an-hour minimum wage. Another point of contention: Should an ordinance include a provision that exempts businesses that determine their wages through collective bargaining? If a proposal passes the council but fails to appease labor advocates, activists say they will collect the signatures required to get an initiative on the November ballot and let Seattle voters decide the issue.

Waging War. Kshama Sawants successful campaign for a seat on the Seattle City Council brought the $15 minimum wage issue to the forefront.

Kshama Sawant, the City Council member and socialist firebrand who has become a powerful voice for the $15 NOW campaign, dismisses the attempt to include tips and benefits in the minimum wage calculation, saying it is unfair to workers and would set a bad precedent for other cities contemplating similar minimum-wage increases.

Seattle is now seen as a test case for other cities and the pro-$15 forces fear that any dilution of their message weakens the effort going forward. At the heart of the issue is a yawning disconnect not unlike the one separating the very rich from the rest of the American populace between an altruistic desire among some to right wrongs and fear among many companies that rising costs will undermine their operations and, in some cases, put them out of business.

According to a study prepared for the mayors committee by the Evans School of Public Affairs at the University of Washington, about 100,000 people working in Seattle make less than $15 an hour, and the majority of those earning low wages mirror the general population: non-poor, some college education, white and not receiving public assistance. The most common occupations of these workers are food preparation and serving, sales, office and administrative support, personal care and service, and transportation and material moving.

Many business owners opposed to higher minimum wages wont speak publicly about the wage increase because they dont want to alienate employees and they worry about labor groups picketing their property. But, on background, they say a $15 minimum wage would force them to make deep cuts in hours and services. Some say they would have to shut down certain operations altogether. A large tourism-related company with hundreds of call operators says it would be forced to move those jobs out of Seattle. Food processors, too, say they could be forced to move hundreds of jobs from the city.

Michael Wells, executive director of the Capitol Hill Chamber of Commerce and a member of the Income Inequality Advisory Committee, says that if the worst-case scenario comes to pass a $15 base minimum wage becoming effective January 1, 2015, with no exemptions there would be people closing shop, there would be lost hours and lost benefits.

Retailers, who already struggle to compete with ecommerce companies, would face tougher times. Destiny Sun, owner of The Confectional, which sells miniature cheesecakes at locations in Pike Place Market and on Capitol Hill, says her eight-year-old business nearly broke even last year. She says she would have to close one of her locations and staff the other herself if the minimum wage in Seattle climbs to $15 an hour. After she spoke at a City Council hearing, Sun says her business received angry phone calls. Niz Marar, owner of Wild West Trading Co. and several other area clothing stores, wrote to the mayor: If the $15 minimum wage is enacted, we would go out of business immediately and all our 25 permanent staff (up to 50 seasonally) will be out of a job. Its that simple.

Restaurants, which have among the highest failure rates of any business, could face a similarly rough road. Tamara Murphy, who owns Elliott Bay Cafe inside The Elliott Bay Book Company on Capitol Hill, says a $15 minimum wage would raise her annual costs $45,000. Since she currently nets $12,000 annually at that location, she says she might have to close it. Tom Douglas, Seattles most prolific restaurateur, is a vocal supporter of better wagers for restaurant worker but insists that tips should be factored in. It makes no sense to have a carved-out exemption [excluding tips from the minimum wage] when the IRS and the State of Washington both concur that tips are earned income, he says. The 15 Now campaigns unwillingness to acknowledge this, he asserts, precludes thoughtful, meaningful conversation on the issue.

Nick musser, general manager and executive chef at Icon Grill downtown, says a $15 minimum wage would raise his labor costs by $190,000, far more than the $70,000 he netted last year. Musser is president of the Seattle Restaurant Alliance, a loose coalition of about 1,000 restaurants and bars. He says a minimum wage of $15 would be particularly unreasonable as it relates to paying servers, many of whom already make about $32 an hour when their tips are included. At $15 an hour, the annual wages of many servers, with tips included, would climb to more than $75,000. (In 43 states, the minimum wage for servers is set at a far lower rate to account for income from tips, but tipped employees in Washington must be paid at least the states minimum wage.)

Many hotels face a similar challenge. While most already pay employees, including housekeepers, more than $15 an hour, for example, staff in their restaurant and banquet businesses receive much of their pay in the form of tips or similar service-related compensation. Higher minimum wages, they say, would force them to increase prices and make it harder for Seattle to compete for convention business. Conventions are critical to a tourism sector that supports 53,000 jobs in the region and contributes $479 million in state and local tax revenues.

The higher minimum wage could also have a cascading effect on costs. Seattle wholesalers who supply the restaurants say that at $15 an hour, they would be forced to raise prices but could then have trouble competing with Pierce County suppliers who would be paying only $9.32. Wages of other employees up the ladder would also have to rise. If Im forced to pay an inventory clerk with no notable skills at a rate of $15, then my electronic assemblers who have skills will then expect and demand more pay, says the owner of an electronics manufacturing firm responding to an online survey conducted by Seattle Business magazine.

The impact of an increase in minimum wages would also pop up in other unexpected places. Consider Seattles 11 colleges and universities. Many of them provide students financial assistance by hiring them for various jobs on campus. If the universities are required to pay substantially higher minimum wages, they could be forced to either cut back hours of students or support fewer students. Nonprofits, home care providers and hospitals would all see their costs rise.

Even high-tech companies, which dont offer many minimum-wage jobs, could be affected because they do depend on services that employ low-wage workers. Over time, technology companies will try to make services more cost effective to deliver, says Matt McIlwain, managing director at Madrona Venture Group. To avoid using couriers, for example, more companies might choose to use such services as DocuSign, which allows two parties of a contract to use digital signatures on emailed documents.

While increased efficiency could mean more profits for tech companies, its not hard to paint a dismal picture showing fewer jobs for unskilled workers and higher labor costs weakening the retail, restaurant and hotel sectors as well as undermining the vitality of Seattle even as cities in surrounding areas attract more business. In the worst-case scenario, reduced vitality could put Seattle in a slow downward spiral that saps energy from the downtown area and pushes new growth into the suburbs.

It wont happen right away. Expansion by successful companies such as Amazon will continue to attract more people to Seattle and increase demand for services. Still, if Seattle raises the minimum wage by too much and too quickly, it could be pegged as a city that is unfriendly to business, a reputation that could hurt efforts to attract new companies to the area. Although no study has been done to estimate the potential job losses of a $15 minimum wage in Seattle, a February report by the Congressional Budget Office estimated that a 40 percent increase in the federal minimum wage a $2.85 increase to $10.10 an hour would eliminate 500,000 jobs across the nation.

In 1938, congress created and president Franklin D. Roosevelt signed a law mandating the first federal minimum wage 25 cents an hour to stabilize the economy and set a basic standard of living for workers. In 1998, when Washington states Legislature decided to go above the national minimum wage of $5.15 an hour and link wages to the annual rise in the cost of living, many warned that the measure would kill jobs.

Jobs have continued to increase in Washington, however, and there clearly are benefits to a higher minimum wage. Today, the states minimum wage of $9.32 translates to an annual salary of $19,385 for someone working a 40-hour week an amount still too little for an individual to cover basic needs in Seattle, but far better than the federal minimum of $7.25. At $15 an hour, the annual wage for a full-time worker would jump to $31,200.

Heidi Shierholz, an economist at the Economic Policy Institute in Washington, D.C., says a higher minimum wage helps the economy because low-wage workers spend a high proportion of their added earnings. Depending on what minimum-wage level the City of Seattle ultimately selects, the pay hikes could result in families spending hundreds of millions of extra dollars at local businesses on such things as cars, clothing, housing and food.

Even a modest increase in minimum wages would lower government costs for social services such as Medicaid and the states administration of the federal Supplemental Nutrition Assistance Program, or SNAP, better known as food stamps, according to a February study by the Washington State Budget & Policy Center. A study by UWs Evans School of Public Affairs found that 61 percent of workers on public assistance make $15 or less per hour.

The Institute for Research on Labor and Employment at the University of CaliforniaBerkeley looked at 14 cities that experienced an average wage increase of 40.6 percent, with an average per-step increase of 17.6 percent. The study found restaurant employment didnt decline during the seven years after the wage increases, while higher wages increased retention rates, lowered training costs, raised morale and cut absenteeism.

But no study has ever looked at the impact of a 61 percent increase in the minimum wage of a city to a level that is twice the national rate. Thats because there is no big-city precedent for what Seattle is considering. And there is a big gap between the aggregate benefits to the economy of a minimum wage increase and the real impact on business.

Hanauer, for example, recently conceded that total income including tips and benefits should be calculated as part of any $15 minimum wage in Seattle. Joe Crawford, the CEO of Hanauers Seattle-based pillow firm, Pacifc Coast Feather Company, earlier had told The Seattle Times: If someone were to force me to move the base wage in our manufacturing organizations to $15 an hour, we would be out of business in six months. Period.

Dick Conway, founder of The Puget Sound Economic Forecaster, argues that workers deserve a $15 minimum wage. If the states minimum wage were pegged to the Employment Cost Index rather than the Consumer Price Index, and Seattles higher cost of living were taken into account, he says, Seattles minimum wage should be $16.82 per hour. The $15 proposition, Conway concludes, is not outrageous.

But Conway admits a more moderate increase in the minimum wage would probably be more prudent. If the federal government increases wages by $2.85 and Seattle increases its wages by a similar amount, Conway says, the impact on Seattle would be negligible. The few hundred millions of dollars in higher costs could be relatively easily absorbed through a combination of a modest number of lost jobs, a minor increase in prices and lower business profits. I believe we should boost the minimum wage by $2.85 [to $12.17] and see what happens, says Conway. [But] if you go beyond that, you are sticking your head out.

The ultimate impact of any City Council ordinance, of course, will depend on the details. Sawant has recently shown herself willing to compromise to allow exemptions for nonprofits and small businesses. Also on the table is some kind of phase-in period ranging between two and five years to give businesses time to adjust to wage increases by gradually increasing prices, finding ways to increase productivity or renegotiating leases.

Mayor Murray has promised special consideration for small businesses. I realize it may be hard for some of them to offer employees $15 per hour, he says. This is also a social justice issue because we know many immigrants start small businesses.

One problem with a high minimum wage is that it reduces a businesss flexibility in managing its employees. Most companies, for example, bring in new workers at lower wages and then raise their wages as they gain experience. If firms are forced to pay higher wages right away, executives say they will hire workers who are already experienced. That would mean fewer jobs for unskilled workers in Seattle.

As well, if the minimum wage doesnt factor in total compensation, including health care premiums, bonuses and tips, companies like Ivars, Dicks Drive-In and Pagliacci Pizza, which already differentiate themselves by providing better benefits than most national fast-food chains, might feel pressured to reduce those benefits. Starbucks CEO Howard Schultz has said the coffee giant may not be able to afford all the benefits it now provides its workers if the federal minimum wage were increased to $10.10, as has been proposed by President Obama.

One large manufacturer in the Seattle area pays low wages but offers generous bonuses that boost a workers average annual pay to $70,000. A higher minimum wage would force the company to cut performance bonuses, reducing productivity and increasing the chances that the operation might ultimately leave Seattle.

Proposed exemptions for groups like small businesses and nonprofits could also create problems. For one thing, they undermine the purpose of a minimum wage, which is to put a floor on worker earnings. They also create market distortions. In the city of SeaTac, which implemented a $15 minimum wage in January, hotels with fewer than 100 rooms were exempted, so one hotel with more than 100 rooms simply closed a block of rooms to qualify for the exemption.

Han Kim, an investor in several hotels in SeaTac, including the Holiday Inn Express, says he cut his hotels airport shuttle service and hired a third party headquartered outside the citys boundaries to lower costs. Other hotels have outsourced their laundry services and one hotel closed its restaurant.
Freiboth, of the county labor council, acknowledges that a new ordinance is bound to cause some friction. The only way to cause no stress for the business community would be not to do anything, he observes.

But at Pagliacci Pizza, the stress is exceedingly personal for co-owner Galvin. He feels close to his employees, many of whom have worked for him for years. While he says layoffs would be the last thing hed consider, the rising debate has put him in a quandary. Its impossible to contemplate and do realistic planning for next year, Galvin says. This is a multimillion-dollar decision for us. Were just one business and we dont know how it will shake out.

Additional reporting by Leslie Helm and John Levesque.