Wage hikes put small businesses in tight fix

By Deborah L. Cohen

CHICAGO - Houston-area restaurateur John Marion Carrabba admits he doesn't like change. Many of his wait staff have been with him since the first of two Piatto Ristorante locations opened its doors seven years ago, and he tries not to alter his menu more than once every 18 months.

But this year will be different, Carrabba says. In July, the prices of his upscale Southern Italian fare will go up, following an earlier increase in December. That's when the second of three scheduled federal minimum wage rate hikes takes effect, pushing the hourly wage floor in Texas to $6.55 from $5.85, the current national minimum.

"It didn't really affect us last year because food costs weren't going crazy the way they are right now," says Carrabba, who employs a staff of more than 70 at his full-service restaurants, including some 15 cooks and dishwashers who earn above the current minimum but below the new rate. "This time it's going to take a bit of a juggle."

The price of flour used to make pizza dough, for example, now costs about $26 for a 50-pound sack, compared to just $8 a year ago, Carrabba says. Couple that with higher energy costs and increased consumer worries over the cost of eating out in a weakening economy and you have a recipe that threatens profit.

"I've got to take it a bit on the chin," he says.

Carrabba appears to be in good company. Texas is one of 18 states - primarily in the South and Midwest - preparing for the next federal wage hike. The 32 others and Washington, D.C., already have state hourly minimums set above the national level. But many in the latter group will have to adjust next year, when the last of the planned federal hikes pushes the national minimum wage to $7.25 per hour.

The food service, hospitality and retail sectors - all industries that rely heavily on low-wage workers - are likely to be the most affected by the increases, economists say. And small to mid-sized businesses, unlike larger rivals with economies of scale, may find it more difficult to wring savings elsewhere in their operations.

"We have to learn how to control our costs better," says Morris Michael Gee, whose family operates The Pants Store, a chain of four casual clothing outlets in Birmingham, Alabama, where the minimum wage is set at the federal level.

Gee, who teaches marketing at the University of Alabama at Birmingham, says all too often small retailers mimic patterns of bigger competitors, such as attempting to operate under extended hours when they don't have the staffing to support such moves. None of The Pants Store outlets, which pride themselves on customer service, is open later than 6 p.m.

But the retailer would be hard pressed to find qualified workers willing to start at the minimum wage and typically it pays entry-level staff at least $2.00 above that rate, says Gee, noting that wage hikes such as the one this summer tend to up the ante for all employees in the sector.

"If the minimum wage goes up, they expect some type of increase," says Gee, "It moves up the whole deal."

SERVICE MAY SUFFER

A large portion of the cost of running a small business is skewed toward wages, says Kenneth Troske, a labor economist at the University of Kentucky, who has studied the minimum wage in Kentucky and Missouri. When those businesses can't raise prices, they may be forced to slow their hiring, he says.

"Lots of times you're able to pass increases on to your customers - harder in a competitive environment," Troske says, noting that small businesses in rural areas are likely to bear the brunt of the pending federal wage hike.

William Dunkelberg, chief economist with the National Federation of Independent Business and a professor of economics at Temple University, predicts that hiring will slow, and in some cases, small companies may cut staff. It all adds up to a reduction in service, he says.

"There is no free money laying around. Every dollar a minimum wage worker gets has to come out of somebody's pocket," he says. "What it does mean is & fewer people taking care of the customer. Service will be slower, prices will be a little bit higher."

How small companies will handle the pending federal wage hike remains to be seen. It hinges on factors such as the health of the broader economy and whether consumers react to attempts to jumpstart spending, such as the additional tax rebate many will receive under the recent economic stimulus package.

"It is something we are watching very closely, particularly with the economy in a difficult condition right now," says Rob Green, a spokesman for the Washington-based National Retail Federation. "Labor costs for small business, they are significant, and do impact the bottom line."

(Deborah Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com)