Part 3 – Increasing The Minimum Wage Rate: Solution or Problem?

By Rick Howard | January 12, 2016 | Comments Off on Part 3 – Increasing The Minimum Wage Rate: Solution or Problem?

 

Part 3 – Increasing The Minimum Wage Rate: Solution or Problem?

 

Many states have, or are considering, increasing the minimum wage rate. I’ve written two articles to help business owners/managers analyze the impact a wage rate increase (Part 1), and to discuss some of the primary strategies in dealing with it (Part 2).

In this article, I want to back up and look at the big picture overall, asking the question at the heart of the issue…

Is increasing the minimum wage rate a solution? Or does it add to the problem?

I have many more questions than answers, but I believe we need to consider as many perspectives as possible to better understand the issues and any possible solutions. Most issues are extensive and a full discussion and analysis is beyond the scope of this article, but making a summarized list still has great value.

What is the problem to begin with? In many areas, especially downtown metropolitan areas, the minimum wage is claimed to be less than what is necessary to live in that area. I have no reason not to believe this statement.

Free Market and the Labor Force –

Free market economics would dictate that wage rates should rise as the available labor pool goes down. In other words, I’m willing to bid against a competitive business and pay a higher wage rate to get the employee I want. If there are a lot of qualified workers, then I don’t have to compete to get a new employee and can pay less.

Yes, I’m discussing economics. Just so you know, I graduated with a degree in both accounting and economics.

The available labor pool has remained relatively high. This last economic recession has recovered in many sectors, but the re-employment of the labor force has been the slowest in history.

Many other areas of the economy has recovered nicely. This includes business profitability. In other words, many businesses have been able to recover their profitability with a smaller labor force.

Many are tired of waiting for the labor to fully recover, and believe that businesses are taking advantage of them…  So, they want to force the issue by increasing the minimum wage rate.

While I understand it, and can sympathize with it, there are some problems with the rationale and consequences to this increased minimum wage rate solution.

Small Business vs Large Business –

Most of the small businesses that have recovered from the economic recession have a similar labor force as before the recession. The very large businesses are the ones that have recovered their profits with a smaller labor force. They have done this primarily by 1) investing in equipment and systems that have reduced their reliance on employees, and 2) not re-hiring less productive middle-management personnel that were cut during the recession.

The large business still have their share of entry level employees. Examples are WalMart, Target, and the fast food chains. But they have rehired in these positions at a similar rate. The problem is that the labor pool is still full from these recession lay-offs.

Small businesses tend to have a greater percentage of their total labor in the lower wage rate group. Any change in a minimum wage rate has a far greater impact on their operations. The greater the change, the more difficult it is for a small business to manage its implementation and business survival is a real threat.

Regional Factors –

Low wages are the biggest concern in the larger cities, but the minimum wage rates are generally addressed on a state-wide basis. There is a higher cost of living in many of these cities. Is there a solution that could be regional in scope as well?

Raising Prices Minimizes the Benefit of Wage Increase –

Businesses will have to raise their prices to survive a minimum wage rate increase. Employees will end up using much of their increased wages to stay at previous purchase levels, negating much of the earning power any wage increase generated.

Higher Labor Costs will Reduce the Labor Pool –

With high labor costs, businesses will feel financially assaulted. They will be looking to reduce costs in order to survive. This will include labor. As the larger businesses did during the recession, smaller businesses will look at new ways to increase efficiency inventing in equipment and systems in order to reduce their dependence on labor.

This may actually be a benefit to some businesses since the wage rate increase will motivate them to make production investments. But employees will lose out. Unemployment will go up with a minimum wage rate increase.

Business Failure –

Some businesses will not survive a significant wage rate increase. The financial impact is real and significant (see Part 1 article). Those businesses that understand the potential impact and quickly implement effective business strategies will survive

Other businesses won’t be so fortunate. The businesses at most risk are small businesses with owners that may not be the best “business managers”, but love their customers and their employees. We all know them and appreciate them. But they are the ones who are often “busy” with the day-to-day operations and aren’t prepared to manage such a change effectively. If you know someone like this, please share these articles with them. These tools and discussions are especially for them.

Quality of the Labor Force –

I started towards the beginning of this article discussing the size of the labor pool and economic theory. What I forgot the address is the “quality” of the labor force.

There remains great, hard-working, courteous employees entering the labor pool. We need more, but seem to have less.

There has always been a certain number of employees that have an entitlement attitude and are easily distracted by any thing other than work. The number of distractions today are greater than ever. Technology and social media has encroached the business environment and when left unaddressed, productivity is damaged. Social media relationships that are device-to-device has had an adverse impact on basic face-to-face social skills (eg- telephone and customer service skills).

Employee basic skill sets are often missing and additional training is necessary. With a higher minimum wage rate, employers will be less patient and employees will need to demonstrate their production value quickly.

If the minimum wage rate is increased, I would like to see discussion around a lower temporary minimum wage rate for training purposes (eg – $2.00 below the actual minimum wage rate). It could be limited to the first three months (for example) which would make it difficult for employers to abuse the rule. It is too costly to turn over employees every three months to save a few dollars. It perhaps would create a better training environment and understanding between the new employee and the business.

The point is, both the business and the employee benefit when the employee is competent. This creates value in the employee. If the business doesn’t respond and increase the employee’s wage, he/she can easily find a better job else where.

How can the quality of the labor force be increased? The social debate begins! School, home environment, community activities, etc.  For now, the business hires as best it can and trains.

What did I miss?

This is a quick list… Please comment below with additional issues, concerns, or to expound on any item discussed above…

 

Series Links…

 

Posted in Business Tax, Issues & Discussion