Local Minimum Wage Increases Provide Insight into the Potential Impact of Broader Legislation

Local Minimum Wage Increases Provide Insight into the Potential Impact of Broader Legislation

Photo credit: spmenic

By Compensation Works

With some states recently passing legislation increasing minimum wage above the federally mandated $7.25/hour, there’s active debate on the impact of increases to cost of labor, especially for those businesses for which labor is a significant expense (for example, food service industries). While there is talk of raising the federal minimum wage to $10.10 an hour, some cities (Seattle, which is phasing in a $15 minimum wage) and companies (The Gap, which this past February announced that by mid-2015, its lowest paid employees will receive $10/hour) have moved forward with a commitment to increase entry level pay without a federal mandate.

Slate writer Jordan Weissmann referred to the Seattle’s decision satisfying “curious economists everywhere who love it when cities turn themselves into living laboratories”. As a Seattle-based compensation professional (with clients across the country), I have found the debate regarding the city’s newly-approved $15/hour minimum wage fascinating.  Strong opinions have been expressed, both for and against.  I’ve heard everything from “It’s not enough; minimum wage should be $20 an hour!” to “This is going to force me to close my business”.  Political history provides many examples of overly-stated predictions on the impact of new regulations. If you think back to the Fair Labor Standards Act (FLSA), the Civil Rights Act, or the 19th Amendment (giving women the right to vote), the true impact of new regulations is neither dire nor triumphant. It usually falls somewhere between the two extremes.  Seattle is the petri dish where we will see what the potential impact could be for companies, cities or states considering a future minimum wage increase.

Reaction to Seattle’s New Minimum Wage

Any time you change a pay rate considerably, in Seattle’s case by 60%, there is going to be a noticeable impact on certain sectors.  If you are in a high-tech firm or professional services firm, this change is likely to have very little impact on your organization in the short term.  However, if you are in retail, health care, manufacturing or food services, industries that rely on lower-cost labor, the impact of this new regulation is likely to have a significant and immediate effect, despite the fact that there is a 3 to 7 year transition period.

Many companies and employees impacted by passage of the new regulation have shared strong reactions. These types of reactions can be expected elsewhere as talks of wage increases progress. Some that we have heard in the Seattle area:

  • Entry level employees are excited that they will have enough money for their own apartment, a car and other items previously not accessible to them while earning the current minimum wage
  • Companies are threatening to move their business outside Seattle city limits
  • A small brick-and-mortar retailer, with competitors selling online, is planning on closing its doors when pay hits $12/hour; their internet competition faces a different cost structure that better accommodates the change in labor costs.
  • Businesses are monitoring employee headcount to ensure they are employing less than 500 people, allowing these companies several more years over which they need to adopt the pay increase
  • Conflicted non-profits are excited that there will be more pay equity and social justice, and are simultaneously trying to figure out how to increase payroll to accommodate the new rates
  • Recent college grads are upset that, while they are making $1000 per month student loan payments, they will be no better off financially than non-college-educated peers
  • A large manufacturing firm will go from being in the black to being in the red overnight
  • Hiring managers are being challenged by job candidates when they offer pay rates below $15/hour because “that’s the new minimum wage”
  • Seattle-based hiring managers expect that they will have their choice of top candidates because individuals will be willing to commute into the city to get higher pay rates.

If you live in a location near a city or state expected to increase minimum wage, you’ll likely feel the impact as well. Organizations located outside the City of Seattle will likely not be the competitive beneficiaries of the pending minimum wage increase.  When San Francisco increased its minimum wage rate, there was a significant impact on organizations just outside the city as starting hourly pay rates in surrounding areas began to move up as well. This was a result of the competitive marketplace for talent; in order to compete for the same workers as San Francisco companies, other Bay Area organizations had to raise their pay rates. The impact continues to spread. In fact, California has passed a law that will raise the minimum wage to $10 per hour in 2016.

For organizations directly impacted by upcoming changes to minimum wage rates, and those that compete with them for talent; even those in locations experiencing legislative pressure to raise rates, now is the time to start planning.

Some actions we recommend you take now:

1) Analyze the regulations and the relative cost of implementation using two lenses:

-Look at the impact of raising everyone to the new minimum rate

-Look at the cost of feathering the pay rates for positions that are close to the minimum wage or for positions that supervisor the minimum wage jobs.  Individuals close to the minimum wage jobs expect to get more than their less-experienced peers or those with a narrower job scope.

2) Develop an action plan for implementation of the new pay rates including effective employee communications to be delivered as soon as possible.  Your employees will want to know what the plan is for pay adjustments and your managers should be able to explain a cogent, long-term plan for coming into compliance with the new regulation.

3) Explore different pay structures, different staffing models, and changes to the career ladders that will allow you to attract and retain the talent you need

Of course, only time will tell what the total impact of the new regulations will be.  Meanwhile, I’d love to hear from you.  How are you planning to implement the new regulations?  What do you expect the impact to be on your business? What questions do you have? I look forward to hearing from you!



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