Multi-year minimum wage hikes pile stress on Arizona businesses

As Arizona enters its third of four years of minimum wage hikes, some industries are struggling harder than others. As labor costs rise, they’re having to raise prices, cut employee hours, or even shut down.

For Steve Chucri, president and CEO of the Arizona Restaurant Association, it’s been a tough couple of years.

“We’re a pennies business,” Chucri said. “When your margins are as thin as ours, you can’t take the cost increase without having to address it in some manner.”

Arizona is one of 43 states and municipalities ringing in the new year with minimum wage hikes. Two years ago, Arizona voters approved Proposition 206, the initiative that mandated four years of incremental increases to raise the hourly minimum wage from $8.05 in 2016 to $12 by Jan. 1, 2020. This year, it rose from $10.50 to $11.

To cope, Chucri said his members are using various tactics: laying off employees, working longer hours, increasing employee workloads. Some have been squeezed out of the market entirely.

“Unfortunately, some of our predictions have come true,” said Chucri, who has lobbied unsuccessfully to oppose “arbitrary” across-the-board wage increases. “We’ve had to turn to the menu to increase prices. And you never want to do that.”

A national wave to raise the minimum wage is meant to reduce poverty. Reports on the impacts are mixed. But new evidence indicates the long-term effects could create the opposite result.

A recently published study that analyzed California employment data from 1990 to 2016 shows that minimum wage hikes cause slowdowns in employment and negatively impact low-wage workers in higher proportions. The results are unnerving: each 10 percent increase in wages leads to nearly a 5 percent decrease in employment in industries with higher percentages of lower-paid employees. Other industries see a two percent reduction. The authors calculated California will lose about 400,000 jobs by the time the minimum wage reaches $15 in 2022.

Minimum wage increases also were shown to lead to decreased employment rates in another extensive study published this year in the American Economic Review. The authors studied four decades of city-industry employment figures and found that minimum wage hikes have a negative effect on employment over 10-year intervals. This is mostly due to more companies closing rather than laying off workers.

In Arizona, industries most impacted include:

Small business Small businesses employ 45 percent of Arizona’s employees, according to the United States Small Business Administration. A business with three minimum-wage employees will pay $24,648 more per year for their wages in 2020 than it did before the wage hikes were started. That doesn’t include additional costs associated with the law’s requirement for a minimum amount of paid sick leave.

Hospitality Employment in this sector continues to increase faster than other sectors but increasing minimum wages too high and too fast will hamper the industry’s ability to continue to offer good jobs with benefits, said Brian Crawford, Senior Vice President of Government Affairs for the American Hotel & Lodging Association.

Restaurants While the industry saw two and three percent growth in the past year, profit margins are down for many companies including big chains like Darden that owns Olive Garden, the Yard House, Capital Grille, and other restaurants. Higher labor costs are to blame.

Fast Food With large numbers of minimum wage workers and small profit margins, restaurants like McDonalds, Taco Bell and Jack in the Box report increasing prices to offset higher labor and other costs, according to menu researcher Datassential.

Mechanical trades This industry which hires apprentices and minimum wage workers may be less likely to hire unskilled labor.

Schools, municipal and state budgets As wages increase, state employee benefit costs rise. Studies in some states with wage hikes show they will cost agencies millions of dollars more in contracts with private providers.

As industries brace for another year of hikes, opponents warn that low- and middle-income families are most likely to suffer in the long run. Instead of blanket increases, wage hikes should be based on market conditions including the cost of living and type of industry.

“I believe this is foolhardy and not what the free market is about,” Chucri said. “This backlash against business is misguided.”