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The Impact of Potential Minimum Wage Increases on Small Businesses

01 / 06 / 17 | Employers

As the economy changes and evolves, we are beginning to see changes in the hiring process. Staffing agencies can help offset the higher costs of hiring new employees with the potential minimum wage increases.

Introduction

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There is plenty of controversy surrounding the economic impact of raising the federal minimum wage. As we watch what happens as individual states raise minimum wages above current federal minimum wage rates, we can get a clearer idea of what, exactly, will be the impact on employment rates (including employment rates for unskilled workers such as teens and minorities), how small businesses’ net profits are affected by increased labor costs, and the unexpected ripple effects created by such minimum wage rate hikes.

Early evidence gleaned from across-state studies show that there is, indeed, an effect on the unskilled labor market, with a consistent evidence of job loss. However, there are also studies that purport no real negative effects of raising the minimum wage, either in small or large increments at a time.

But how people and groups interpret study data is often bound to preformed biases, how statistics can be manipulated to support a preconceived hypothesis, and political support for one side or the other. What really matters is the real effect that small businesses are seeing as minimum wages are raised: is a higher minimum wage better or worse for the bottom line? Are businesses forced to reduce their workforce to deal with higher labor costs? And, if so, how can small businesses counter rising labor costs and still remain viable?

Who Must be Paid Minimum Wage?

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With some exceptions, all agricultural and non-agricultural employees must be paid either the federal minimum wage (which, at the time of this writing is $7.25), or the state’s minimum wage—whichever is higher—for all hours worked for the benefit of the employer. Exceptions might be workers under the age of 15 or workers who receive tips.

Minimum Wage Laws

The United States enacted a federal minimum wage in 1938. At that time, the statutory minimum wage was set at $0.25. The Fair Minimum Wage Act of 2007 enacted a series of federal minimum wage hikes, the last of which occurred on July 24, 2009, when the federal minimum wage was raised to $7.25. States may pass laws mandating a minimum wage higher than the federal minimum wage, but all employers must pay covered non-exempt employees at least $7.25.

Minimum Wage Policies

Policies are created to define what, exactly, a government wants to implement via legislation. For instance, minimum wage rates could be classified as an economic policy by either the federal government or the individual states. This policy sets out to help create a law that benefits the poorest and most unskilled workers in society. In this case, creating a federal minimum wage might be called an example of economic regulation, where the State attempts to regulate a specific outcome based on its policy of benefitting poor or unskilled workers with a minimum wage.

Why Should Businesses Hire Staffing Agencies?

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While many small and large businesses had to shed employees during the first few years of the Great Recession, those jobs have slowly come back, even if the era of employees-for-life has changed. These days, your workforce needs to be flexible, and you need to be able to adapt to changing economic situations very quickly. One question mark in many business owners’ minds is whether or not the federal government will raise the federal minimum wage, and whether or not their state’s legislature will raise the state’s minimum wage rates. With so much uncertainty surrounding labor costs going forward, hiring a staffing agency can be a simple solution.

Reduce HR Costs

There are currently 2,200 employment laws and clauses that HR departments must comply with when hiring or firing employees. Companies who run afoul of these laws and clauses risk incurring fines and penalties—sometimes in the millions of dollars. Shifting that burden to a staffing agency reduces a business’s liability because employees are listed under a separate employer of record. Staffing agencies specialize in knowing, understanding, and complying with the laws and clauses, thus reducing a business’s need to maintain a large HR department.

Increase Employee Productivity

Workers have become increasingly enamored with staffing agencies during the last decade as layoffs have increased and job security has diminished. Staffing agencies take a lot of the trial-and-error out of finding the right job, and when an employee is matched well to a job, productivity increases. Whether you are looking for temporary staffing or permanent employment solutions, staffing agencies serve both the workers and the employers by acting as job matchmakers. As a business owner or hiring manager, the more information you share about the specific skills you require, the more closely a staffing agency can find the best match. When both employer and employee are satisfied, productivity—and revenue—increases.

Reduce Employee Turnover Rate

In this era of disposable jobs, workers move around frequently, and this costs businesses a great deal of time spent in finding and training replacements. Because the expectation of being able to work for a company for life has completely changed, workers change jobs an average of 12 times throughout their careers. Whatever the factors are that have led to this state of affairs (and they are many and varied), reducing the need to hire and train new employees can greatly affect the bottom line.

When the right people get the jobs, employee turnover decreases. It may cost up to twice an employee’s salary to find and train a replacement, so finding the right person for the job is crucial to keeping them long-term. Staffing agencies help reduce employee turnover by being able to match potential employees with job positions for which they are qualified and passionate.

All of the Above Increases Internal Money Budgets

Being able to reduce the HR department, increase employee productivity, and reduce turnover rates all contribute to a healthier and more robust bottom line.

Economy

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The Ripple Effect of a Minimum Wage Increase

No legislation is made in a vacuum, and the same is true for any increase in the minimum wage. While some states are implementing scheduled hikes in state-mandated minimum wages to eventually land at $15/hour, there is no historical precedent for this type of increase that we can look at to see how this will affect small businesses and commerce in general. It is important to identify the possible ripple effects and then carefully watch the results. Possible ripple effects could be:

  • Higher unemployment of poor, unskilled workers. Although minimum wage laws have always been enacted in order to benefit poor, unskilled workers and minorities, increases in the minimum wage tend to harm this very group. As James Sherk, research fellow of Labor Economics at the Center for Data Analysis writes, “Minimum wage earners usually earn low wages because they lack skills and experience. Higher-skill workers are more productive and will work only for higher wages. When the minimum wage forces employers to pay higher wages, they substitute highly-skilled and productive workers for lower-skill workers, destroying job opportunities for lower-skilled workers…A minimum wage increase forces businesses to pay the workers they hire more, but it does not force businesses to hire the same mix of workers. As a result, businesses hire different workers, to the disadvantage of lower-skilled, low-income workers.” [source: here]
  • Increases in the costs of goods and services. As labor costs rise, businesses are forced to pass those higher costs on to their consumers in the form of increased costs of goods and services, according to the Congressional Budget Office (CBO). While businesses can also choose to reduce the number of goods and services they provide, this is often not feasible. This rise in costs of goods and services decreases consumers’ buying power.
  • Loss of minimum wage jobs. The National Small Business Association (NSBA) states that “a 5 percent increase in minimum wage would equate to a 2.5 percent loss of all minimum wage jobs. NSBA states that most small businesses that do pay minimum wage are typically in highly-competitive industries with low profit margins, and a nearly $3.00 per hour increase for any employees could be devastating.”
  • Near-minimum wage earners will also get pay raises. Those earning slightly less or slightly more than minimum wage will expect to see their wages increased proportionately.
  • Creating a federally mandated $15/hour minimum wage ignores the differences in states with lower costs of living relative to those states with higher costs of living. States with lower costs of living generally pay less in wages because earners’ money goes further than those who live in states with higher costs of living. How will this affect prices of goods and services in lower cost-of-living areas?
  • A mandated minimum wage increases hiring costs above the new rate. The Affordable Care Act (ACA), the employer share of payroll taxes and unemployment insurance taxes, and other government mandates all increase the cost of hiring significantly above the mandated minimum wage. Where employers have historically defrayed these costs by reducing employee wages by an offsetting amount, mandated minimum wages prevent this. This can have a negative effect on hiring new workers.

Effects of a Minimum Wage Hike on Employment

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The possible effects of a minimum wage hike on employment is a hotly debated topic, and if you look long enough and hard enough, you’ll find good evidence to support your opinion on both sides of that debate. On the U.S. Department of Labor’s website, the department calls the idea that people will lose their jobs after a minimum wage hike a myth. The site quotes a letter written to President Obama and congressional leaders by “more than 600 economists, including 7 Nobel Prize winners” that states, “In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.” [source: here]

Other researchers tends to disagree, however, by saying that it’s all in how you look at the data. From an article written by David Neumark at FRBSF Economic Letter: “How do we summarize this evidence? Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.” [source: here]

Mark Twain famously quoted a phrase written earlier by Leonard H. Courtney: “There are three kinds of lies: lies, damned lies and statistics.” It may not be possible to pinpoint all the effects on employment that a minimum wage hike will create except in the broadest of terms. John Wihbey, writing at the Journalist’s Resource, says, “In the minimum-wage debate, much depends on framing and assumptions, as well as one’s interpretation of the larger patterns of increasing wage inequality in the United States. Although there is no doubt that inequality has risen significantly over the past few decades, studies can be found to support positions on both sides of the minimum-wage issue, and questions remain about the precise relationship with inequality dynamics.” [source: here]

Conclusion

Minimum wage policies have always been to help the poorest, most unskilled workers find gainful employment that will increase their skill levels and increase their opportunities. Whether or not that is the actual outcome of federal- and state-mandated minimum wage laws is a subject that is surrounded with great controversy. Some states and cities have already legislated minimum wage hikes to $15/hour, and Congress is also debating enacting a federally mandated minimum wage hike, which will affect all states. Regardless, minimum wage mandates affect small businesses when it comes to labor costs, and that affects hiring levels and hiring rates.

Rising labor costs significantly affect a business’s bottom line. One way to decrease the costs of hiring or firing employees is by utilizing a staffing agency. Staffing agencies take on the burdens of a large HR department and help match potential employees’ skills and experience with employers’ needs. This helps to reduce employee turnover while increasing productivity—both of which further help to increase the bottom line.

Atlas Staffing assists businesses with their staffing needs in Spokane, Boise, Yakima and Beaverton areas. Contact us today to find out how we can help you.