From the December 2001 issue of Entrepreneur

Business is good for Jim Amaral. His bakery, Borealis Breads, has grown beyond its original Wells, Maine, store to include three other locations, annual sales are averaging $3 million, and the company's baked goods have been featured on CNN.

But more is rising at Borealis than bread. Three years ago, Amaral, 44, decided to start paying his 60 employees a "living wage" that averages almost $3 more than the federal minimum, plus benefits. "I just kept bumping people up until they were at $8 an hour," he says.

Amaral made the decision to raise employees' pay on his own. Entrepreneurs in other areas of the country, however, now face laws that require them to do the same. Since 1994, at least 62 U.S. cities in 24 states have enacted living-wage ordinances that require employers to pay up to 100 percent above the federal minimum wage. In October 2000, Santa Cruz, California, passed the nation's highest living wage, $11 an hour with health insurance, or $12 without benefits.

The Growing Debate

Advocates for these ordinances, including the Association of Community Organizations for Reform Now (ACORN), believe today's minimum wage is simply too low. "It's not keeping up with the pace of inflation," says Jen Kern, director of ACORN's Living Wage Resource Center in Washington, DC. "When people are working three jobs and are still sleeping in their cars, there's a problem."

Until recently, living-wage ordinances only applied if you had contracts with your city for more than a certain dollar amount. But new rules passed in Santa Monica, California, in June may signal a new trend: All companies with more than $5 million in annual sales in the city's downtown and beach-front business districts will be required to pay a minimum of $10.50 per hour to workers with health insurance, and $11.75 to those without health insurance starting next year.

Not that new laws are the only thing drawing businesses to living wages. Employers who make the move are rewarded with happier, more productive workers, says Karen Kraut, a coordinator for Responsible Wealth, a Boston-based network of businesspeople and investors concerned about economic inequality. Responsible Wealth encourages employers to sign covenants promising they'll pay more than minimum wage. While it may result in lower profits and some additional costs passed on to customers, Kraut maintains that living wages reduce the cost of absenteeism, turnover and retraining.

Amaral-who signed a covenant-sees improvement in recruiting and retention, particularly in the baking and early-morning delivery positions that are critical to his business. It's also been a good marketing tool. "We're not just selling bread, we're selling the company," he says. "Paying living wages, and letting people know that you do it, makes a tremendous amount of sense." His customers, he adds, don't mind paying a little bit extra to a socially responsible company.

Not everyone is so convinced. The U.S. Chamber of Commerce, the National Restaurant Association and other business organizations view living wages as anti-competitive and costly. Low-wage employees ultimately lose, they say, because employers must eliminate jobs. When the Employment Policies Institute in Washington, DC, surveyed 336 economists last August, more than 75 percent thought a national living wage would lead to lower employment, and almost 70 percent felt it was an inefficient way to address the needs of low-income workers.

Critics also question who really benefits from minimum wage increases. The majority are teenagers or people in their early 20s, says Mike Bartlett, director of labor law policy at the U.S. Chamber of Commerce in Washington, DC. In the end, Bartlett says, economics should govern what makes good business sense. "This is an artificially increased wage, and the smaller the employer, the less flexibility to handle the problem."

Beyond the Minimum

Unless a local ordinance requires you to comply, paying a living wage remains a personal choice. Amaral suggests you think about it early on. "Write it into your business plan about how you're going to get to a point where you're paying a livable wage over three years," he says. How does an established business make the switch? The first step is to estimate the financial hit and to determine whether you will need to raise the cost of your services. You should also phase the raises in slowly so you don't add chaos to your cash flow. Amaral based his raises on performance.

When she founded Independent Marketing Services (IMS) two years ago, Krishna Fells-Mathison, president and CEO of the Mt. Vernon, Washington-based financial services outsourcing company, incorporated living wages into her business plan. She calculated hourly wages based on her estimated overhead and profits, and also built in incremental raises determined by employees' productivity and the success of the company.

Today, employees at her 20-person firm start at $10 per hour plus benefits, and she recently gave them across-the-board raises ranging from 3 to 8 percent. Fells-Mathison, 48, shells out $50,000 a month on wages alone-but she sees a payoff: Her turnover rate is only 1 percent annually, and sales this year are estimated at $2 million. She believes that paying higher wages shows respect for employees and motivates them to work harder.

"It's our responsibility as business owners to do good budgeting and growth," she says. "If we do it reasonably well, we should be able to pay people decently so they'll do the work we want them to do."