News last month about Amazon's decision to raise wages for full and part-time employees to a minimum $15 per hour renewed conversations around wage competitiveness for small businesses. The retail giant's move puts pressure on small businesses to do the same. News that Amazon intends to lobby for a heightened federal minimum wage only adds to that upward pressure.
Minimum wage policies have been changing on the state and local level for a long time. Many states have moderately increased their minimum wages, and some of the biggest cities have hiked their minimum wages even further, some to $15 per hour. There are other businesses voluntarily raising their lowest wages well beyond the local required minimums.
Whether voluntarily or in compliance with the law, one thing is clear: Wages are rising after being virtually stagnant in terms of purchasing power over the past four decades. Employers who fail to at least match their competitors' wages risk losing out in a competitive labor market, while those in jurisdictions with mandatory hikes must raise wages to simply comply with the law.
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State and local minimum wage laws are changing
Currently 29 states plus D.C. have a minimum wage higher than the federally mandated minimum of $7.25 per hour. Twenty-seven states and D.C. have increased their wages since January 2014, meaning many businesses have had to adjust in recent history. Moreover, 42 cities nationwide have adopted their own minimum wages that are higher than their state's.
The same trend is also underway in Canada, where Toronto, Ontario, raised minimum wages from $11.40 per hour to $14 per hour last year, with another hike to $15 per hour set to go into effect on January 1, 2019. Certain sectors of the economy are already responding by renegotiating contracts with suppliers to offset the inescapable cost of wage increases.
"It has had minimal impact on our business directly," said Brian Bosscher, president and founder of the Toronto-based Condo Control Central. "[But] we have seen certain segments of our customers negatively impacted as they try to renegotiate their contracts to address the wage increase."
In cities like Toronto and its American counterparts, including Seattle and San Francisco where the minimum wage is $15 per hour, small businesses have no choice but to comply with the law or face enforcement actions and lawsuits. But it's not only legal force that's leading to increased wages, many businesses are doing so voluntarily. [Is your small business looking for a better way to manage payroll? Check out our best picks for online payroll services.]
Why businesses voluntarily raise their wages
A relatively strong economy and a competitive labor market due to low unemployment mean there is upward economic pressure on wages as well. To remain attractive to talented candidates, businesses have to offer more attractive working conditions to job seekers (which often means better pay first and foremost) than their competitors.
Business leaders are acutely aware of the power of increased wages. According to a Wall Street Journal/Vistage survey conducted in December 2014, 30 percent of the 740 small business CEOs polled intended to raise wages voluntarily to attract more job candidates and retain talent. An additional 17 percent intend to add to benefits packages as well.
Many business owners, including Andrei Vasilescu, CEO and digital marketing expert at Don't Pay Full, understand that if they want to keep their best workers and continue bringing in the candidates with the most potential, they have to remain competitive. That's why Vasilescu offers automatic annual wage increases, as well as a bump mid-year.
"I own a small online business which needs a team of tech-savvy smart minds as programmer, designer, digital marketer, sales analysts, etc. None of those professionals work at basic wages, and these expert professionals are always wanted by other companies," said Vasilescu. "Hence, to retain them in my business … I have to give them something extra."
The corporate social responsibility perspective
It's not always a pure bottom-line motivation that leads to wage hikes either. Some businesses voluntarily raise wages because they believe in giving their employees a living wage, which accounts more for the cost of living in a given region than the going rate for labor.
One such company is Coastal Credit Union, which is organized as a cooperative and headquartered in Raleigh, North Carolina.
"As a cooperative and a responsible corporate citizen, we felt like it was necessary to take the initiative to ensure that our own employees are able to earn enough to take care of themselves," said Joe Mecca, vice president of communication for Coastal Federal Credit Union. "Coastal puts employee engagement at the core of what we do, and we believe it is every bit as important as member satisfaction and overall business performance."
Coastal initially increased its minimum wage to $12.50 per hour in 2016 and raised it again to $15 per hour in March 2018. Although Coastal's rationale was employee-focused, they've recognized the hallmark rewards of paying employees a living wage: reduced turnover, higher employee engagement and a boost to productivity.
"It’s not just socially responsible, it makes good business sense. In our experience, increasing the minimum wage has been well worth it. We're enjoying high levels of engagement, which helps with member satisfaction, productivity and our overall financial results."
Wages have been historically stagnant
As minimum wages are set to increase, it is important to note that average real wages remain stagnant. In fact, it has been decades since real wages increased at all. In 1964, the average real wage was $20.27 (in 2018 dollars). Today, despite massive gains in productivity, the average real wage stands at only $22.65. While businesses are beginning to recognize the benefits of giving their employees a higher minimum wage, thus far, real wages haven't appeared to move much at all.
Will the rising floor for wages lead to more significant bumps in wages across the board? It's not certain. What is clear, however, is that increasing the lowest wages and staying ahead of the curve can pay off for small businesses in big ways.
Moreover, as large companies like Amazon try to corner the labor market and local and state governments alike mandate higher minimum wages, rising labor costs appear to be an inevitability entrepreneurs must contend with sooner or later, for better or worse.