Singin’ Those Car Wash Blues

Setting aside the traditional economic arguments against increasing the state’s minimum wage rate, what impact would a proposal currently in the Pennsylvania House of Representatives have on employees in a small business?

Take, for example, the hypothetical Croce’s Car Wash in South Philadelphia which employs a dozen full-time workers who earn the current minimum wage of $5.15 per hour to wash and dry cars. In total, the payroll costs of Croce’s Car Wash are currently $131,969 per year, including Social Security payments and no other benefits.

But state Representative Mark Cohen of Philadelphia has a bill pending that would raise the state’s minimum wage from $5.15 to $7.15 an hour in 2007 and then gradually increase it each year beginning in 2008. His plan would raise Croce’s Car Wash payroll costs to $182,748 in 2007—an increase of $50,779, or more than 38 percent.

If the car wash turns a net profit of $4 per car cleaned, the owner needs to wash almost 12,700 more cars annually or 244 more per week, to merely cover the added payroll burden created by government’s artificial increase in the minimum wage.

The reality is that the owner of Croce’s Car Wash has few alternatives unless he’s able to wash 244 more cars per week to break even. He can:

• Simply take the $51,000 out of his pocket and give it to the full-time employees (if that is practical given the narrow profit margins of most small businesses), or
• Get rid of three or four of the full-time employees and tell those who remain that since their pay has gone up by almost 40 percent in two years they will have to pick up the slack left by the layoffs.

Aside from the owner washing nearly 12,700 more cars per year or his being financial able to absorb $51,000 in additional labor costs, there is no conceivable scenario that does not result in the loss of full- or part-time jobs at Croce’s—the kind of entry-level jobs that low-income and former welfare recipients need.

Repeat this scenario thousands of times at restaurants, filling stations, fast food eateries, janitorial services, private day care centers, small retailers and other businesses across the commonwealth and you have some understanding of the negative impact the Cohen proposal would have should it pass.

The economic evidence against the government-mandated minimum wage is overwhelming. While it benefits those low-skilled workers who are fortunate enough to remain employed, it kicks many other people off the first rung on the workforce ladder.

A Heritage Foundation poll last year showed 71 percent of economists believe minimum wage mandates hurt the young, unskilled and women most of all. This is because only less than one percent of all American workers earn the minimum wage—and less than one tenth of that number are single earners with children. Therefore, given the demographics of who actually earns the minimum wage, the primary beneficiaries of an increase in Pennsylvania are workers in a family with an average annual income of $50,000 or more, according to an Employment Policies Institute analysis in 2004.

Other beneficiaries are employees currently earning more than the minimum wage. Why is that? Because if an employer is forced to increase the pay of his lowest-paid workers by nearly 40 percent, he will also likely be forced to provide raises to employees who were above the current minimum wage rate but below the new artificially set floor. An upward domino effect is inevitable.

That is why organized labor is the primary supporter of increasing the state’s minimum wage—it directly benefits from such government mandates. Union leaders understand that if government raises the floor by nearly 40 percent, all employers with a unionized workforce will eventually be compelled to raise the artificial pay rates in collective bargaining agreements.

Yet despite the claims of labor unions, the economic reality is that increasing the government-mandated minimum wage ultimately hurts the very people it is supposed to help. But then again, unions aren’t in the business of protecting jobs for those who most need an entryway into the workforce.

Indeed, if the Cohen measure, or one like it, passes at the state or federal level, those who are fortunate enough to keep their jobs at Croce’s Car Wash might have “…those steadily depressing, low-down, mind-bendin’, workin’ at the car wash blues.” But, at least they will still be working.

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Matthew J. Brouillette is president and CEO of the Commonwealth Foundation (www.CommonwealthFoundation.org), a non-partisan, non-profit research and educational institute located at the foot of the Capitol in Harrisburg.