In 1979, you could buy a dozen eggs for 86 cents. Today, a carton of eggs may cost you nearly $5 (or more), depending on where you live. Gas is pushing past $5 per gallon in many areas of the country, and expenses like electricity, rent and college education have skyrocketed. But as everyday goods, services and expenses have steadily increased, employees’ wages have lagged far behind.
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That could be changing slowly. Many states have increased their minimum wages, and some areas have hiked their minimum wages beyond $15 per hour. Even in cities where legislators aren’t raising the minimum wage, small businesses must consider increasing compensation to recruit much-needed talent for open positions.
We’ll outline the minimum wage changes your business should understand, explain how they impact operations and share tips for mitigating the costs.
Small businesses must understand federal and state minimum wage laws to stay compliant and competitive. Minimum wage laws change periodically and can vary widely by state and city.
Currently, 30 states, plus Washington, D.C., have a minimum wage higher than the federally mandated minimum of $7.25 per hour. Thirty states, plus Washington, D.C., have increased their wages since January 2014, so many businesses have had to adjust their wages.
Washington, D.C., has the highest minimum wage rate at $17 per hour, followed by Washington state and California. In Washington, the minimum wage is $15.74 per hour. California follows closely behind Washington, with a minimum wage of $15.50.
Moreover, 48 cities nationwide have adopted minimum wage rates higher than their state’s required amount. The highest local minimum wage is in West Hollywood, California, where employers are required to pay their workers $19.08 per hour. The minimum wage in Seattle is a close second ― it increased to $18.69 per hour in January 2023.
In these cities, where legislation has been enacted to mandate a minimum wage increase, small businesses have no choice but to comply with the law or face enforcement actions and lawsuits.
The rate at which many states and cities are adopting increased minimum wages suggests that these increases are highly beneficial. Increased minimum wages are correlated with many positive economic impacts, including the following:
It’s not uncommon to hear that minimum wage increases have disastrous consequences, particularly for small businesses. However, economic research into the impact of minimum wage hikes on small businesses suggests that increases aren’t harmful and might even be beneficial.
In an analysis of reports following the start of the COVID-19 pandemic, the Center for American Progress examined the status of businesses in states that increased the wage floor and states whose minimum wages remained at the federal minimum. The researchers’ findings included the following:
Based on this data, the notion that minimum wage hikes kill small businesses and reduce job opportunities appears to be false. Instead, raising the minimum wage seems to improve entrepreneurs’ abilities to start new businesses and attract and retain top talent.
Moreover, additional research published by the hiring employees found that minimum wage hikes did not correlate with an increase in small business failures.
Still, any increase in the minimum wage is bound to impact a small business’s balance sheet. While there might be some benefits associated with increasing workers’ pay, small businesses must first be capable of absorbing the costs.
Many small businesses aren’t prepared to pay increased labor costs out of pocket, so it’s essential to prepare for new legislation. The following tactics can help you bring in more money and reduce the money flowing out of your business so you can better handle potential increased labor costs:
Planning for increased minimum wage costs can be challenging but not impossible. That’s especially true considering that most cities and states with minimum wage increases give businesses several years to gradually step up compensation; they don’t expect them to drastically increase hourly wages overnight. Some businesses build regular, voluntary wage increases into their budget anyway, whether or not they operate in a jurisdiction where minimum wages are increasing.
Beyond regulatory mandates, small businesses also find themselves in an environment where hiring and retention are challenging and their most significant expense ― labor ― is growing due to market forces. The Great Resignation left many employers in desperate need of workers, especially mid-career employees with in-demand career skills and experience. This means job candidates have significant leverage in negotiating compensation and courting multiple offers.
To remain attractive to talented candidates, businesses must offer more attractive working conditions to job seekers (which often means better pay, first and foremost) than their competitors.
Many business owners, including Andrei Vasilescu, CEO and co-founder of DontPayFull, understand they must remain competitive to keep their best workers and continue bringing in the candidates with the most potential. That’s why Vasilescu offers automatic annual wage increases as well as a midyear bump.
“I own a small online business, which needs a team of tech-savvy smart minds as programmer, designer, digital marketer, sales analysts, etc.,” Vasilescu explained. “None of those professionals work at basic wages, and these expert professionals are always wanted by other companies. Hence, to retain them in my business … I have to give them something extra.”
Well-paid employees are less likely to leave, reducing turnover, which highly impacts morale. Retention is essential in a business landscape where the average cost of replacing an employee is between half to two times their salary. Losing valuable
No one wants expenses to go up. However, business owners understand the value of investing in critical assets. Your small business has no greater asset than its employees, so their wages should be considered investments. Moreover, increasing compensation is a compliance issue in states and cities where minimum wage increases are legislated.
While paying higher wages can positively impact your business, you must plan to absorb the costs of minimum wage increases to realize the benefits of increased employee recruitment, retention and morale in your small business. Cutting extraneous costs, raising prices and optimizing your business hours are essential when facing a rising minimum wage.
Small businesses that navigate minimum wage increases successfully often find themselves in an economically healthy environment where consumers have more disposable income to spend on goods and services. They also have happier, more productive and more loyal workers. If you plan accordingly, minimum wage increases don’t have to be an obstacle. They can benefit your business and employees.
Shayna Waltower and Max Freedman contributed to this article. Source interviews were conducted for a previous version of this article.