What a Minimum Wage Hike Could Mean for Your Business

In the 2014 State of the Union address, President Obama proposed raising the federal minimum wage from $7.25 per hour to $10.10 an hour, and soon after signed an Executive Order to raise the minimum wage to $10.10 for federal service contractors.

If you’re a business owner, panic might be the first reaction. How would an hourly hike affect your labor costs? Your workforce strategy? Your product pricing? Here’s what you should know about a potential increase in the minimum wage.


Local minimum wage increases

Employers are required to comply with all applicable minimum wage laws. That means if a state or local government passes a minimum wage that is higher than the federal minimum wage, the employer must pay the higher rate to employees in that state or city.

The federal minimum wage reached $7.25 in 2009, the result of an incremental increase over a three-year period. Since then, 23 states and the District of Columbia have pushed that rate even higher.

Seattle recently passed a minimum wage increase of $15 an hour – the highest in the country. The minimum wage increase will take affect for big businesses with more than 500 employees by 2017, while small businesses with less than 500 employees will have to implement within 7 years.

The bottom line is that higher-than-federal minimum wage rates are the trend, but keeping an eye on the statehouse and local governments might be more helpful than keeping an eye on Congress or the White House.


Workforce indications

An August 2012 study conducted by Texas A&M University found that increases in the wage floor produce little effect on layoffs and turnover, but “directly reduce job growth.”

On one side of the coin – let’s say the quarter in $7.25 – research indicates that employee raises (government mandated or otherwise) lead to greater retention, according to a UC Berkeley study. That softens the budgetary burdens associated with recruiting, onboarding, training and assimilating new employees.

On the other side, you have businesses hiring fewer people due to the increase in the marginal cost of an employee. The reduced demand leaves millions still looking for work. Additionally, it stifles the momentum of growing companies.


How to cope with costs


When faced with a jump in labor expenses, you have a handful of ways to react:

  • Letting go – In addition to layoffs, you might also consider trimming the number of part-time, temporary and/or seasonal workers you employ.
  • Spending cuts – Taking a stern look at travel and entertainment expenses can save a business thousands of dollars. Things like excessive sales trips, lavish hotel rooms and steak lunches can add up in a hurry.
  • Boosting productivity – The increased retention associated with higher wages means that you may hold onto your more experienced employees who may be more productive. And with plumper paychecks, employees may be more motivated to produce more or better work.
  • Getting organized – If it’s been awhile since you dusted off the old org chart, consider looking at ways to realign your business to maximize efficiency. This could involve reconfiguring job duties across the company and adding responsibilities to the minimum wage jobs to justify the greater expense.
  • Passing it on – Price increases on products and services may be deemed necessary to offset higher labor costs. But if you’re worried about consumer spending, you might want to.
  • Take the hit – Supporters say more consumer cash means more money for businesses. Sacrificing a percentage of your profits until the money makes it to your door is yet another option.

But you don’t have to go at it alone. Click here to see how Insperity can keep tabs on the ever-changing state and federal laws for you, and help you adjust your business practices accordingly.