Maximizing Minimum Wage

Introduction

​In 2016, the leaders at Sheetz Inc., a family-owned chain of convenience stores headquartered in Altoona, Pa., decided to raise the wages for all its hourly staff to $10 per hour, even though there was no legal mandate to do so in any of the states in which the company operates. 

Boosting wages for the more than 11,000 workers at Sheetz’s hundreds of locations by 5 percent to 7 percent translated into a cost of $15 million in that year alone. Yet clearly the company thought it was a worthwhile investment. “We aim to pay better than 9 out of the 10 competitors for the labor force,” says Stephanie Doliveira, the company’s vice president of human resources. “So when Wal-Mart raised their wages, we responded.”

It may be no surprise that Wal-Mart’s 2015 decision to pay its employees more than minimum wage would affect how other retailers compensate their workers, nor that Sheetz, named a top place to work by Fortune magazine, would quickly follow suit. But when even the notoriously profit-motivated Wal-Mart—the nation’s largest nongovernment employer—raises wages voluntarily, it could be a sign that the law is out of step with the current employment market. 

​​The federal minimum wage of $7.25 hasn’t budged since it took effect in 2009, with inflation eroding its buying power by about 10 percent since then. In 2012, low-wage workers launched the global “Fight for $15” movement, which, as its catchy name implies, has been pushing to more than double the U.S. minimum. 

Yet despite having the support of high-profile advocates such as Sen. Bernie Sanders (I-Vt.), who this year introduced a bill to gradually raise the federal minimum wage to $15 per hour by 2024, a Republican-controlled Congress is unlikely to approve such a move any time soon—and even many advocates of an increase concede that a jump that large would likely lead to the elimination of jobs. 

In the meantime, however, the fight has spurred nationwide debate, and legislators in numerous cities, states and counties have jumped in to provide higher minimum wages, creating a patchwork of requirements. In 2017 alone, 21 states—including California, New York and Florida—have raised their state minimums, with current rates ranging from a modest $7.50 to a high of $11, with incremental raises to come. Some cities have gone even further. Seattle, for example, recently hiked its minimum to $15. 

Another complication: Minimum-wage laws often phase in the wage increases gradually over a series of years, and with varying requirements for businesses of different sizes and for tipped employees. As further legislation is considered in state capitols and city halls from coast to coast, employers and HR professionals face a complex and ever-changing compliance climate.

At the same time, leaders at an increasing number of companies are voluntarily opting to raise minimum pay, either to stay competitive in today’s tight labor market or out of a growing recognition that few people can make ends meet on the current federal minimum.

Increasingly, companies are voluntarily opting to raise minimum pay, either to stay competitive or out of a recognition that few people can make ends meet on the current minimum.

Not Enough to Get By?

​Although a dollar goes further in some places than others, living on minimum wage is tough everywhere—especially if you’re trying to support a family, as about one-third of minimum-wage workers are. According to a recent report from the National Low Income Housing Coalition, there isn’t a single U.S. state in which people earning $7.25 per hour can afford the rent for a two-bedroom apartment, assuming they are spending 30 percent of their income on housing, which tends to be the nationwide norm. At that rate, an individual would have to work an unsustainable 117 hours per week to pay the rent. 

“These are workers who have trouble affording rent and living without racking up significant credit-card debt,” says Paul Sonn, general counsel and program director at the National Employment Law Project, which favors a higher minimum. “Getting a $3,500 raise [to their yearly pay] is enough to enable workers to afford better housing and to cover basic living costs without going into debt. For workers with children, it enables them to afford healthy food and nutrition and other things,” he adds. “A wide range of social and public health indicators improve when workers at the bottom get raises,” Sonn says. 

For now, though, many minimum-wage workers—including 52 percent of fast-food workers and nearly half of home-care workers—rely on government subsidies such as food stamps and Medicaid, according to a 2015 report from UC Berkeley’s Center for Labor Research and Education. These statistics suggest why some people argue that a stagnant minimum wage forces taxpayers to subsidize businesses that employ large numbers of low-wage workers.

​On the other hand, opponents point out that the minimum wage was never intended as a living wage, but rather a learning one. “I’m continually reminding legislators that the wage is just one part of the investment that an employer makes in an employee,” says small-business lobbyist Randi Thompson, Nevada state director of the National Federation of Independent Business. When a business hires younger or entry-level workers, she notes, the workers are often essentially getting paid to learn how to do the job. Once they start excelling , she says, then they’ll see their salaries increase in kind. 

'It’s so simple to say, "Oh, just raise the price for a burger by 5 cents"—that might be fine for a McDonald’s, but it’s not for a small convenience store [that] is competing with a Wal-Mart.'

—Randi Thompson, National Federation for Independent Business

A Risky Move to $15

​Both sides of the debate have strong arguments, and economists who study the effects of raising the minimum wage project both gains and losses, at least in the short run, with higher wages improving incomes for many while costing jobs for some. Harry Holzer, a professor of public policy at Georgetown University, points to the 2014 report from the Congressional Budget Office—based on data from a range of previous studies—which estimated that raising the federal minimum to $10.10 per hour would cause a wage increase for 16 million to 24 million people, but would also spur the loss of about 500,000 jobs. 

However, job losses could swell much higher than that, especially in the long-term, if wages went up higher still. “Going to $15 or even to $12 will generate much bigger employment losses,” Holzer says. “You’d be getting into a range where you have a lot more people being bumped up. It’s not that easy for employers to reorganize the workplace to automate more or to start shifting work to a different location. But, when the costs get high enough, it’s worth doing,” he says. 

The research on the impact of these larger wage increases is just starting to trickle in. A study published in June by the National Bureau of Economic Research, which looked at the consequences of the Seattle Minimum Wage Ordinance, found only modest repercussions from the law’s first phase, which raised wages to $11 an hour in 2015—but much greater consequences when the floor went up to $13 an hour last year: The larger wage increase reduced hours worked in low-wage jobs by 9 percent. So, although hourly wages rose by about 3 percent, total wages actually fell by an average of $125 per month for low-wage workers.

​Interestingly, the study found no effect on employment in the restaurant industry. But that could change as the minimum edges upward. “When you’re talking about $15 an hour, that’s an extreme that pushes wages up beyond where competition is, and it really makes it untenable for a tight-margin business like ours,” says Eric Oppenheim, SHRM-SCP, CEO of Republic Foods Inc., which operates 17 Burger King franchises in Maryland and Washington, D.C., and contends with an array of local minimum wages across several counties. “An entry-level job is not a $15-an-hour job when you’re charging $2 for a hamburger—it defies the laws of economics.” 

'An entry-level job is not a $15-an-hour job when you’re charging $2 for a hamburger—it defies the laws of economics.'

—Eric Oppenheim, SHRM-SCP, Republic Foods

Rise of the Machines

​To stay in business while complying with the law, many in Oppenheim’s position have started replacing workers with machines. “What we’re seeing in many industries, especially the fast-food industry, is they’re turning more to electronic means of getting customers to place their orders,” says Frank Cania, SHRM-SCP, president of driven HR, a Pittsford, N.Y.-based firm that helps small and medium-sized businesses with regulatory compliance. 

“In Panera Bread, there were usually five or six cashier spots. [But] if you look at the newer stores or the stores they’ve remodeled, there are two cashier spots and five to eight [self-service] kiosks,” he notes. “The speed with which they’re implementing some of these things has increased because of … increases in labor costs.” Many fast-food restaurants and grocery stores have followed suit, possibly prompting those in other industries to invest more in automation as well.

That’s something Joe Dutra, owner of Reno, Nev.-based Kimmie Candy, has considered. The candy-maker, which has 38 full-time employees, spends 60 percent of its product cost on labor, paying above Nevada’s legislative minimum to attract workers who could earn $12 an hour in the area’s booming construction industry. Because his products compete with candy made in Mexico and China—countries that have much lower labor costs—Dutra can’t easily raise prices. So if the minimum wage gets too high, he’d need to cut employees. “We almost can’t have less people making the candy, but we can have less people packaging it if we automated it,” he says. “Right now we don’t care because it’s not critical,” but at some point bringing in new equipment becomes more cost-effective than using minimum-wage labor. “The equipment would pay for itself in a couple of years.”

​

Impact on Middle-Income Jobs

​Even businesses without many minimum-wage workers are taking notice of what’s happening with minimum-wage legislation. “Almost daily we’re hearing updates,” says Lisa-Marie Gustafson, SHRM-SCP, HR manager at Hexcel in Mount Vernon, Wash., a manufacturer of airplane parts that employs more than 6,000 people worldwide, most of whom are hourly. Though the company has no minimum-wage employees, Washington state’s hike to $11 per hour this year, which will rise to $13.50 in two years, affects hiring. 

According to newly released Labor Department data, in this past quarter, weekly pay for the lowest earners (those in the 10th percentile) rose faster since this time last year than for any other group of workers.

“The minimum wage is being raised to a level where those jobs that were once considered good middle-class jobs”—like working on an assembly line—“are now being viewed as ‘that’s pretty much minimum wage’ or ‘[that] will be minimum wage in a couple of years,’ or ‘there’s not much difference between that job and being a cashier at a department store,’ ” Gustafson says. 

[SHRM Members' Only Resource: Minimum Wage Rates by State and Municipality]

​The pay compression she describes happened at Curriculum Associates, a North Billerica, Mass.-based publisher of educational tools, when CEO Rob Waldron decided in 2015 to voluntarily raise the minimum because he wanted to provide a living wage to his entire staff of 650 full-time employees. 

“Rob asked me for the list of folks who were currently making less than $15 an hour, and what their rate of pay was,” recalls Patty Payette, the company’s vice president of human resources. After calculating that the cost of raising the floor to $15 would be $100,000 per year—a manageable amount—the company’s leaders announced the increase, much to the delight of the approximately 15 warehouse workers who received a raise. What managers weren’t anticipating were the complaints they got from other employees unhappy to be making just over $15 an hour after working for years to get to that point. 

There’s no easy solution to the potential morale problem, short of paying everyone more. “If you do raise the level for those who are above $15 an hour, that bumps into people who are at $17 an hour, and then $19, so where do you stop?” Payette asks.

When raising wages at the bottom, consider a dollar-for-dollar increase at each rung above that, suggests Cania. In other words, if you boosted the minimum to $15, those who had been making $15 would now get $16, etc. Of course, exceptions may be warranted. “That person making $15 an hour might not be worth $16 an hour, so you might want to take the chance that they’re a little disgruntled [after not getting a pay bump].” 

Also look at data from wage and salary surveys for every specific market—down to the most local level—suggests Amy Marcum, a senior HR representative with Insperity, a professional employer organization headquartered in Kingwood, Texas. Find out “not just where the minimum wage is, but also what other employers are doing to attract and retain talent,” she says.

Reaping the Benefits

​Pay compression was not a problem at Aetna, the insurance giant whose CEO ushered in a highly publicized wage hike to $16 per hour for about 5,800 workers in 2015. Instead, leaders have seen nothing but upside—including increased company pride by workers at higher pay grades. For employees who got the increase—which averaged 11 percent—scores on the company’s 100-point employee engagement survey rose from 64 points to 78 points in the year following the raise, with the number holding steady since, says Kay Mooney, Aetna’s vice president of benefits and well-being. 

Turnover also declined, to 15 percent in 2017 from 19 percent in 2014. And because the employees who got the raise work in customer service, the company expected the raise to improve customer retention. “We’re seeing early indications that that’s playing out,” Mooney says. 

Conversely, if you don’t pay workers enough to meet their basic needs, your business suffers, says Pierce Powers, co-owner with wife Lona of Lona’s Lil Eats, a fast-casual restaurant that employs 15 people in St. Louis. The owners pay at least $14 per hour, which Powers calculated to be the least a single person can live on in their area. 

​"Otherwise you get turnover and it stresses everyone out—customers aren’t happy because your stuff isn’t consistent … and the workers are in a bad mood,” he says. “So the first question is what’s needed in this market to be able to get to work and have a place to live and be able to eat and to have a phone—and then, on top of that, how to incentivize productivity.” To afford the $14 wage, the owners pursue a low-margin, high-volume strategy. For example, they aim to sell 500 or more wraps with a one-dollar profit on each, rather than 100 wraps with a five-dollar profit on each.

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