Published On: Fri, Dec 22nd, 2017

How will the 2018 minimum wage increases affect US businesses?

Many low-paid Americans will begin 2018 with a boost to their pay packets thanks to increases to the minimum wage – but will this spell bad news for businesses?

From January there are 18 states and 20 cities that have decided to raise their pay floors, with another three states and 18 cities and counties to follow later in the year.

The trend towards higher minimum wages can be seen as a success for the nationwide campaign to try to secure a $15 hourly wage for fast food workers – a call largely seen as ambitious when first made back in 2012 but that has steadily gained momentum. While many pay floors still sit well below $15 (Newsweek has more details here), many are moving in this direction over the next five or so years.

So, what’s the problem?

photo/ Public domain pictures via Pixabay

Well, first off, it’s important to realize that we’re not just talking about changing a few numbers on your W3 forms – these figures relate to real money, and an increased cost for all businesses. The money has to come from somewhere.

So, while a pay rise may be good news in the short term, an increase in the cost of running a business could mean that some employers can’t afford to carry the same size workforce – or offer the same number of hours to their existing workers. If the cost of production goes up, prices may also have to rise – which could harm sales or generally make goods more expensive, which disproportionately impacts on the lowest paid workers.

Is that just scaremongering? It pays to look at the impact of wage rises where they have been tested so far to see if there are any lessons we can learn when considering the latest batch of increases.

For this, we can turn to Seattle, which three years ago voted to incrementally move toward the emblematic $15 goal.

Earlier this year, the National Bureau of Economic Research published a University of Washington study which appeared to suggest that the negatives outweighed the benefits at a ratio of three to one (raising pay by 3% but cutting hours by 9% and costing workers $125 a month). This study prompted much attention and reaction, largely because it goes against the findings of many studies in the last couple of decades.

Indeed, its findings faced an immediate challenge in the face of the University of California-Berkeley’s Institute for Research on Labor and Employment (IRLE) – which said that the policy was, in fact, having the desired effect.

For businesses, the lesson to take from this experience is to be wary of any ‘black and white’ interpretations. The fact is that there are some benefits. All businesses should want their employees to be happy – it helps with retention and productivity after all – and putting extra income into the pockets of workers helps to boost consumer spending.

On the flip side, raising costs for business clearly adds a burden to their finances. That’s especially the case for small operations in higher-paying states – with Californian restaurants unlikely to be able to keep pace with the Silicon Valley tech giants when it comes to pay.

Businesses need to be aware of the rising costs and plan ahead for this – while not being blind to the reasoning behind it. Standing in the way of a fair deal for your workforce isn’t a good look, after all. With caution and careful planning, the minimum wage increases don’t have to have a dramatic impact either way.

Author: Debbie Fletcher

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