How a $15 an Hour Minimum Wage Affects Franchising

How a $15 an Hour Minimum Wage Affects Franchising

There is a movement sweeping the nation to approve a $15 dollar per hour minimum wage.  This is going to have a huge economic impact on many businesses.  What is minimum wage?  Can I charge more if minimum wage goes up?  How can you choose a Franchise that will thrive under these conditions?

As of January 1st, 2014 Minimum wage was between $7.25 per hour to $9.32 per hour.  $7.25 per hour is the rate for Federal Minimum wage.  This means that all of the states must have wage rates that meet this standard.  States, cities, counties etc. can set rates that are higher but not lower.  The highest rate set by a state in the country is Washington State at $9.32 per hour.  The city of Seattle voted on June 2nd to raise the minimum wage rate to $15 per hour over the next seven years becoming the first municipality to do so.

One of the things my professors pounded into me while gaining a degree in economics is that the ideal price of anything is where supply equals demand.  The price should be dictated by the relationship between how badly a consumer wants a product and how much of it is available.  This is the reason McDonalds produces a hamburger for less than $5 and Microsoft can charge hundreds of dollars for a piece of software that has very little marginal cost.  When minimum wage increases it does not increase the demand for a product.  The cost of producing the product will increase, but generally the price that can be charged for it will not increase unless the supply goes down.  In other words, if minimum wage increases the businesses paying the higher amount to their employees will not be able to charge more unless some of their competitors go out of business.

How are businesses that pay minimum wage going to maintain profitability when it goes up?  There are several ways of doing this.  One is to wait for your competition to go out of business so that you can increase the price you charge.  Waiting for the competition to go out of business might mean they’ll be waiting on you.  It’s not a realistic option although it is going to happen.  Another way to cope with it is to increase the productivity of your employees.  If you are researching a franchise and it hires minimum wage employees, make sure the franchisor has a solid plan for increasing employees’ productivity.  That plan had better not be, “We’ll just work ‘em harder!”  They had better be planning for it and they need to have a good handle on it.  There are lots of businesses that utilize minimum wage employees that are going to survive.  Make sure you’re with a company that can handle it.  Of course another way of dealing with this is to get into a franchise whose employees are already making more than $15 per hour.

A $15 dollar an hour minimum wage is going to be a fact of life in business.  You need to understand it, you won’t be able to charge more for it in the short term, and you will need a franchise company that can help your employees be more productive or earn more than $15 per hour.