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TheStreet Open House

Would Raising the Minimum Wage Derail Small Businesses?

(Story updated with additional comments from the franchise industry.)

NEW YORK ( TheStreet) -- President Barack Obama offered a minimum-wage proposal Tuesday night in his State of the Union address, in which he spoke of how the country has emerged from the rubble of economic crisis, his hope to allow families to more easily refinance their homes and the need for deficit reduction, among other economic issues.

While it's questionable whether a minimal-wage proposal would actually pass in Congress, small-business owners were divided on whether raising the federal minimum wage from today's $7.25 an hour to the president's suggested $9 would be beneficial or harmful.

It's no secret many small businesses are still struggling from a slow economic recovery. Considering payroll is one of the biggest fixed expenses to businesses, some say raising the minimum wage could be a disastrous hit to cash flow and future hiring.

"The law of demand always works: The higher the price of anything, the less that will be taken, and this includes labor," William Dunkelberg, chief economist for the National Federation of Independent Business, said in a statement. "Firms cannot pay a worker more than the value the worker brings to the firm. Raising the minimum denies more low-skilled workers the opportunity to get a job and receive on-the-job training. Raising the cost of labor raises the incentive for employers to find ways to use less labor."

In the restaurant industry, rising food costs and other business expenses such as health care and taxes mean operators are likely to resort to higher menu prices, says Patrice Rice, CEO and founder of Patrice & Associates, a hospitality-recruiting franchise in Dunkirk, Md.

"Raising the minimum wage will not deliver customers with more money in their pockets. It will continue to discourage small businesses from hiring or even keeping minimum wage personnel. Increasing the minimum wage does not help stimulate business," said Earl Wertheim, a franchise developer for The UPS Store.

Sean Falk, a multi-unit franchise owner of Salsarita's Fresh Cantina, Great American Cookies, Mrs. Field's Famous Brands and Pretzelmaker, says most of his employees are part time. "Requiring me to pay a high-school student, who I am training to be a worker in our society, a minimum wage of $9 will crush my business."

"If my employees have a great work ethic, then I immediately pay them more," he says. "If they are poor performers, then paying them $7.25 or $9 per hour will make no difference in their performance, but it will erode our ability as small-business owners to make a profit and, therefore, open new locations."

Responses to the minimum-wage proposal were primarily negative on social media. Here's a few comments via Twitter:

  • @Ralph_Boccella: And increase in min wage dn cost jobs RT @BloombergView: The "small business is the creator of all jobs" meme is. not. correct. #sotu
  • @kendallmejiaa: Yeah let's raise minimum wage to $9 and watch all our small business close and hire less #SOTU
  • @bjaday: Raise the minimum wage and small business will have to hire less workers. And that helps how? #SOTU
  • @CDR48fan: Still not sure how I feel about a $9 minimum wage and its effects on small business and consumer prices from State of the Union. #SOTU

Small-business owners outside of cyberspace were less pessimistic and more concerned whether it would really do much to help low-income individuals.

Kim Drone, owner of Family Tree and Turf Care, a tree care and landscaping business in Marlboro, N.J., supports a minimum wage increase.

"This increase will put more money in the pockets of workers who will spend it in their local economies. That will strengthen consumer purchasing power -- exactly what small businesses need right now," Drone writes in an emailed response.

"Quite frankly, I don't think $9 an hour goes far enough. Here in New Jersey, the cost of living is just too high. If we want people to be self-sufficient, to be able to pay for food and shelter and have money in their pockets to spend in local businesses, $9 an hour still won't be enough," says Drone, who is part of the The Main Street Alliance, a national network of state and locally based small-business groups.

Lenny Verkhoglaz, founder of Executive Care, a home-care-services company in Hackensack, N.J., that started franchising recently, said his employees already are paid more than $9 an hour.

"In major metropolitan areas, $9 an hour wouldn't make a huge difference. I'm coming from the perspective of a New Jerseyian. The president's statement that $9 will get people off public assistance seems a bit far-fetched in my honest opinion," Verkhoglaz says.

(Here's the president on the minimum wage from Tuesday night's speech: "Tonight, let's declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty, and raise the federal minimum wage to $9 an hour. This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. In fact, working folks shouldn't have to wait year after year for the minimum wage to go up while CEO pay has never been higher. So here's an idea that Gov. Romney and I actually agreed on last year: Let's tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.")

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

>To submit a news tip, email: tips@thestreet.com.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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