A rise in minimum wages benefits workers in a myriad of ways, above and beyond supplementing their incomes. However, this adjustment is sometimes difficult for businesses, particularly startups and small-scale organizations.
The additional costs can often be hard to absorb. However, these businesses must consider the importance of employee motivation for talent retention purposes. How do the rising wages impact their business and what can they do to remain competitive with the big organizations? Read on.
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The Reason Behind This Increase
The federal minimum wage increase ensures fair and livable wages for the lowest paid workforce. Currently, Washington D.C. and 30 other states have minimum wages in line with the federal standard of $7.25 per hour. Since consumer prices have increased, however, the need for increasing the minimum wage is more acute than ever.
Raising the federal minimum wage boosts consumer spending, improves the financial health of businesses, and expands the economy. A slight increase would raise output, lower absenteeism, and turnover, and increase employee satisfaction. Additionally, it would stimulate the economy as a whole by increasing consumer demand.
What Do Small Business Owners Have to Say?
Generally, higher wages would mean dipping into the business’s bottom line. A survey of 500 small business owners from different states revealed that 14% of the business owners say they might be forced to let their employees go because of the rise in minimum wages. A further 28% admitted that higher minimum wages would restrict them from hiring additional resources or support staff.
However, one in three of these business owners believe that this shift will give a boost to the employee paycheck, increase productivity, and improve employee retention, minimizing the stress on decentralized and centralized recruitment of external candidates.
What Do Wage Hikes Really Mean for Small Businesses?
On the surface, it appears minimum wage increases might prove harmful for small businesses. Economic research says otherwise, however. The Fiscal Policy Institute conducted research and examined three years of small business activity in states where the minimum wage was above federal standards relative to those where it was not.
The findings concluded that small businesses experienced a 31% growth rate in states with higher wages compared with a 1.6% rate in states with lower minimum wages.
Research shows that there’s a correlation between minimum wages and a reduction in employee turnover, which can cost upwards of 40 percent of the annual salary of an individual employee. Increasing minimum wages has the power to reduce employee turnover and boost productivity, which kind of cancels out the cost associated with higher wages.
Moreover, raising wages puts more money in the pockets of people who subsequently increase their spending on stuff they need the most, ultimately benefiting the overall economy.
How Can Business Absorb the Impact of Wage Hikes?
Businesses in certain industries could face a difficult time accommodating the federal minimum wage increase. These typically include the ones that operate at a lower average profit margin, leaving them little room to afford higher wages.
The best approach is to focus on the things that are within the business’s control. In this fashion, the human resource department won’t have to work on devising new talent acquisition strategies to retain top performers. Here are some ways to absorb the shock:
Reduce Unnecessary Expenses
Start by reexamining every facet of the business. You are likely to find an inefficiency that could save money. Look for extraneous expenses like surplus inventory or unnecessary energy consumption. Cut those expenses to absorb the labor cost while keeping business operations running smoothly.
Adjust the Business Model to Attract More Customers
An obvious way to afford the additional cost of wages is to secure more clients. This could mean adjusting your business model or making minor adjustments such as introducing a loyalty program, offering a free extended warranty, and others.
Increase Product Prices
This is a risky step, but it can work out for a business that has a competitive edge. Consider increasing the price of the product/service to insulate against wage expenses. Before revising the prices, it’s imperative to communicate this change to your customers. This could free up some business capital to pay your employees more generously.
If raising prices could put you at the risk of losing customers, offering a lower-tier option can help retain those who cannot afford a price increase.
Hire Independent Contractors
Reducing the number of hours can sometimes hurt business operations. An alternative is to work with a staffing agency in Denver or in your area and find independent contractors. Certain roles such as that of graphic designers or web developers can be hired on a contractual basis instead of full-time.
This approach can help save the cost tied to hiring full-time employees since independent contractors don’t get benefits or bonuses and are responsible for their own taxes.
In summary, raising minimum wages will definitely impact a business’s balance sheet. As long as the business is capable of absorbing the costs, the tangible and intangible benefits it receives can offset that hike.