While Americans try to decipher the Tax Cuts and Jobs Act of 2017, there are still many unknowns as to how exactly it will affect individuals and businesses across the spectrum.  In New Jersey there is even more uncertainty as it relates to what Governor-Elect Phil Murphy has in store for the coming year relative to his own agenda.  From the legalization of marijuana to stricter gun control, there are many controversial issues that are being discussed.  For business owners in industries such as manufacturing, distribution, and retail, the most important topic right now is minimum wage.

What’s the situation in NJ?

Many states across the nation have adopted increased minimum wages over the federal minimum wage, which has remained at $7.25 since 2009.  While many states already offer a minimum wage higher than that of the federal standards, most of them range between $7.25 and $10 per hour.  A state like New Jersey that currently has a minimum wage of $8.44, indexes the minimum wage for inflation.  Other states have taken a proactive approach to increasing low wage workers’ pay.  States like Arizona, Colorado, and Maine will increase their minimum wages incrementally to $12 per hour by 2020 and Washington will increase its minimum wage to $13.50 per hour by the same year.  Locally, New York City will increase its minimum wage to $15 per hour by the end of 2018 and 2019 (depending on the number of employees a company has) and Long Island and Westchester will hit that mark by 2021.

On the surface, increasing the minimum wage may seem like a great idea.  After all, New Jersey is a high cost state to live in.  In fact, it is among the highest in real estate taxes and estate taxes (not something we brag about being at the top of the charts for).  We are also in the top 10 states for having the highest poverty rate in the nation.  So why not put more dollars in employees’ pockets so they can afford to live in this state – buy homes, pay the high costs of real estate taxes, spend more money and put those wages back into the economy?  Seems reasonable, right?  However, raising the minimum wage in New Jersey could lead to quite a few unintended consequences.

It’s not just the cost of wages…

One of the biggest arguments against raising the minimum wage to as much as $15 per hour are the challenges that may not be foreseen especially because there is so much uncertainty as far as what the effect of raising low wage earners’ pay by 78% might be.

Questions are being raised regarding how it will affect employees who actually make more than the minimum wage now.  One such question might be: “If someone is earning $20 per hour now, will they be impacted at the changes in the work force salary?”  This is a complex question because in an environment with a higher minimum wage, will the $20 an hour worker become dissatisfied by working in an workplace where those who are currently at the minimum wage of $8.44 an hour suddenly receive a raise to $15 an hour?  Logic says there will probably be some dissatisfaction as suddenly that $20 doesn’t seem to have as much spending power. 

Another question arising from this first question might be: “Is there going to be a domino effect, forcing business owners to increase those $20 employees’ salaries to remain incrementally competitive?”  To further complicate matters, New Jersey is a heavily unionized state.  How will labor union contacts be changed or renegotiated?

It is obvious that the actual wages that will be paid in a $15 minimum wage environment are only part of the problem.  This change will also have an effect on employee benefits such as health insurance, paid time off, pension benefits and workers’ compensation insurance.

There are further challenges to consider and questions to answer. “What about the internship and apprentice programs that many employers run?” Under the new circumstances, can employers really afford to pay those employees who are just learning the trade or assisting in more administrative roles to gain real-world job experience at rates in excess of what they pay some of their current employees now?  Many believe that these types of programs will become too costly to sustain and thus will begin to disappear or change dramatically. 

And lastly, don’t forget that $15 will likely not be the minimum if and when it reaches 2018 and 2019.  These rates will be indexed for inflation.

What is happening in other states?

Can New Jersey look to other states and cities that have already enacted a significantly increased minimum wage?  It’s a good start, and something that should be examined.

Take Seattle for instance.  In a study done by the University of Washington, it was found that Seattle’s most recent increase to $13 per hour (a $3 per hour increase) actually reduced low wage workers’ hours by 9%.  The result – a net loss of income of 6%.

And what about California?  A study that was released by the Employment Policies Institute found that a 10% increase in the minimum wage caused a nearly 5% reduction in employment.  Economists at Harvard Business School of Mathematica Policy Research determined that the Bay Area in California has seen many businesses close, reduce staff, or leave the state all together as a result of the increasing minimum wage.  Additionally, based on other studies that have been conducted, it is estimated that approximately 400,000 jobs will be lost by 2022 when the full effect of the $15 minimum wage is phased in.  Some of the most significant hits will be to the retail and food service industries.

What does the future hold for our state?

In low margin businesses such as retail and grocery stores, it is daunting to think about how to budget and account for the potential increase in minimum wage that seems to be on the horizon.  When a business, such as a grocery store, only has a 1% to 3% profit margin overall, where can business owners find room to “trim the fat” in order to accommodate increased wages?  The supermarket industry is already battling the “big box” chains, international entrants into the market, Amazon, food kits (yes it’s been a tumultuous year in this sector).  There is the possibility that the $15 minimum wage will not be applicable to all employees, possibly carving out teenagers who are still in high school, for example.  These carve-outs will be significant, but will they be enough so that the unintended consequences do not come to fruition? 

For now, if your business would be significantly affected by a minimum wage increase, all that you can do is stay informed, get involved in organization associated with your industry (for instance, the New Jersey Food Council for the food industry), and make sure your legislators are aware of what this increase would do to your business. 

Finally, Business owners should plan on speaking with their trusted business advisors for help in analyzing forecasts, cash flows and projections in order to be well-positioned and prepared for any intended, or unintended, consequences from raising wages.