Despite the supposedly booming economy, millions of workers across the country who make the federal minimum wage of $7.25 an hour struggle to make ends meet. According to the Living Wage Calculator provided by MIT, the federal minimum wage is not considered to be a living wage in several parts of the country. While the federal minimum wage has remained steady for over a decade now, several state governments are continuing to raise the minimum wage threshold for workers.
While there is certainly a tendency to applaud increases in minimum wage as a victory for the economic wellbeing of low wage workers, these constant wage increases also come with effects (both positive and negative) for companies of all different sizes. Below, we take an in-depth look at how the 2019 minimum wage increase in several states could affect businesses.
The 2019 Minimum Wage Increases Explained
Across the country, twenty-one states are planning to increase the minimum wage in the coming year (the state of Nevada will not decide on their minimum wage increase until April). In California and Maine, the minimum wage will increase by one dollar to $12 and $11 respectively, while Colorado workers will see an increase of $0.90 per hour and New York workers will increase their hourly salary by $0.70 to $11.10. Collectively, the Economic Policy Institute estimates that the state-wide increases will lead to $5.4 billion in wage increases for five billion workers across the country.
On a corporate level, Amazon, one of the largest employers in the country, announced last October that they would be raising their minimum wage to $15 an hour for all US-based employees. The company also announced that it would begin an aggressive lobbying campaign to increase the federal minimum wage and has urged other businesses to follow its lead. While low wage workers are surely enthusiastic with these increases, what might this increased payload mean for businesses?
Impacts on Margins and Cash Flow
Obviously, a higher minimum wage means that companies will need to allocate more resources to paying their employees. In our highly competitive economy, smaller businesses and startups might certainly be struggling to survive, and an increase in their employee’s salary can be a tipping point that pushes them over the edge. In recent years, some smaller companies have actually been forced to close down operations due to wage increases. Additionally, small business startups might find it harder to receive the funding they need to successfully begin a business due to increased salary requirements.
The impact on profit margins and cash flow can also affect well-established companies who might be forced into pushing extra costs onto customers. In the worst case scenario, this can lead to client dissatisfaction and further economic strain on the business.
Changes in Offered Employee Benefits
Another consequence of hikes in minimum wages is that some companies are forced to change the employee benefits that they offer. While proponents of increasing the minimum wage state that better salaries often lead to happier, more productive workers, those same workers might understandably be upset if they see a cutback in their employer sponsored health insurance plans.
When faced with increased labors costs, companies that don’t feel it is in their best interest to pass these extra costs onto their customers in the form of higher prices are often forced to adjust employee benefits. Paid lunch breaks might be replaced by time and attendance tracking automation that forces employees to clock out for their lunch breaks. Stricter workforce management is often necessary to help companies make the most of the increased labor costs.
Reductions in Number of Employees and/or Hours Worked
In some cases, minimum wage hikes can actually reduce the overall salary earnings of low wage workers. When the city of Seattle raised its minimum wage to $15 an hour, some workers reported cuts in their earnings of up to $125 per month due to reduced working hours. When stricter workforce management doesn’t lead to increased productivity gains and better profit margins, employers are often forced into cutting back the number of hours they offer to their employees.
Furthermore, in some cities and states, the minimum wage laws vary according to the size of the business. For example, in New York City, businesses with ten or fewer employees pay $3 less per hour than businesses with more than eleven workers. In these cases, some businesses might be forced to cap the number of employees they hire in order to maintain a healthy cash flow and profit margin when factoring in total labor expenses. This could potentially lead to less jobs being available as smaller businesses restrict the number of employees they hire.
Also, the variations in minimum wages across the country might also lead to a migration of jobs to states with lower minimum wage thresholds. With more and more businesses being web-based, entrepreneurs and small startups could potentially migrate their business to more affordable states. California-based businesses, for example, might be tempted to move their operations to neighboring Nevada where the minimum wage is $3.75 per hour cheaper.
Possibility to Increase Worker Productivity
On the plus side, an increase in wages can lead to longer tenured employees, reduced turnover, and significant productivity improvements. Establishing an exceptional team that is committed to the goals and vision of a company is an important element for success. Perhaps for this reason, a recent survey found that 47 percent of business owners actually favored an increase in the federal minimum wage.
With increased salaries, however, managers and owners should expect more effort and dedication from their employees. Timekeeping software and better workforce management are good strategies to increase worker output and keep your company focused on both short-term and long-term business goals. Additionally, time and attendance systems or tracking automation can help you validate that your employees are putting in the extra work needed to make up for increased labor costs.
While increases in minimum wage laws can certainly cause economic stress to businesses, a more efficient workforce management might actually allow companies to turn extra labor costs into increased productivity and efficiency leading to better, long-term profit margins.