4 Considerations for Entrepreneurs in the Minimum Wage Debate
I hesitated writing a column on this topic because I suspected some would read the first line or two and then automatically assume I’m against raising the minimum wage. So let me be very clear: This is not a statement for or against. My intention is not to debate right vs. wrong. It’s happening. The minimum wage debate has sailed, and the focus now needs to turn to helping both workers and small businesses navigate these changes in a positive way.
Minimum wage -- steady at $7.25 per hour at the federal level since 2009 -- is fast becoming one of small-business owners' greatest interests. Stepped local minimum wage increases to $15 have already won approval in municipalities including San Francisco, Los Angeles and Washington D.C. with other cities preparing to vote. It’s an issue in the presidential race, with support for a boost to $12 (Hillary Clinton), or an increase of “some magnitude” with details left to the states (Donald Trump).
If you’re a small-business owner who hopes the fuss will die down after November -- it won't. An increase is no longer a what-if question, but rather how high. I believe that an increase in wages is healthy for our economy, but it has to be sensitive to the backbone of small business.
Raising the minimum wage should be good for the overall economy. But I think, as do many economists, that how we implement any wage increase is the key to the survival and success of America’s entrepreneurs. Here are four considerations I think are essential -- two for legislators and two for small-business owners:
1. Make any wage increase national.
A national increase is the only way to level the playing field. Siloed city or state increases are more of a threat to local small businesses because regional and national businesses can manage labor costs across their larger workforces. When everyone pays minimum wage in a community, it diminishes the benefits of paying higher wages to retain staff, but it also makes it easier to modestly raise prices to mitigate the impact on profits.
2. Step, don’t jump.
Moving immediately to a $15 wage asks many entrepreneurs to more than double their labor costs. We can’t go there all at once. We don’t even have solid data on the national impact of a $15 minimum wage, or the effects on lower-earning regions of the country where wages would immediately double for a significant portion of the workforce. That’s a huge hit for small businesses to absorb.
Leading economists are generally much more comfortable with a stepped approach, especially as we approach the murky waters of $15 per hour. Cities such as Seattle have put in a tiered approach.
Finally, in spite of benefits to the overall economy from rising wages, data from a review of economic research on the relationship between minimum wage and employment in North America (conducted by Pierre Fortin at UQAM), suggests that when the minimum wage rises above more than 45 percent of the average wage, jobs are lost. That reinforces that we should step, not jump.
3. Entrepreneurs should focus on retention and productivity.
Turnover becomes more expensive every year. A 2012 study found that turnover cost for positions earning $30,000 or less annually (more than half of all workers at the time) was 16 percent of an employee’s salary. Turnover rates in the hospitality industry alone were at 72.1 percent in 2015.
The time and money you invest in training employees to be productive and creating a supportive environment for them to thrive will give you an enormous return. If everyone’s paying the same minimum wage, then your opportunity to retain employees and avoid turnover cost is in making people want to stay.
A minimum wage increase is on the horizon. We don’t know what it will be, or how it will be implemented. If you think that makes it hard to plan, you’re right! That’s why you need to start now by considering various increase scenarios, crunching the numbers and developing strategies.
Lastly, talk with your team. Your employees and customers have a stake in this too. You’ll navigate these scenarios more smoothly if you know what it will take to keep them in your business as opposed to sailing away in search of a better deal.
Let’s collectively seek a win-win scenario where U.S. workers see healthy increases in their wages and small businesses continue to thrive. We need both to build and sustain a healthy economy -- one far better than most of us have ever seen.