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How Will Federal Minimum Wage Laws Impact Employers?

Posted Sep 28, 2021 03:55 PM
The federal minimum wage was implemented under the Fair Labor Standards Act (FLSA) of 1938. The initial purpose of a federal minimum wage was to stabilize America’s post-Depression economy and protect workers in the labor force. In order to protect desperate workers from being exploited, the minimum wage was established to ensure an equal living wage – a fair amount that could provide enough food, clothing, and shelter for a worker and their family.

However, in the past few years there has been heavy discussion on how the federal and state minimum wage laws do not equate to a living wage. Demands for an increase in the federal minimum wage raises questions such as, how this could impact employers? Will it help them get ahead of the “turnover tsunami”?

Since its inception, the federal minimum wage has increased only 22 times, reaching the current rate of $7.25 per hour. From the 1940s to 1960s, federal minimum wage increases kept pace with productivity growth and inflation. However, after 1968 the federal minimum wage stopped rising with inflation.

Benefits of an Increased Minimum Wage

There are many positive impacts to an increased minimum wage, such as the fact that it can:

  1. Boost Productivity: Employees that can cover their cost of living have better confidence and tend to be more productive.
  2. Reduces Income Inequality: With the current concerns surrounding DEI (diversity, equity, and inclusion) efforts, raising minimum wages could correct income inequality.
  3. Spurs Economic Growth: With employees having more money to spend, there will be an increase in demand and business revenue.
  4. Promotes Education and Self-Improvement: Workers with more money and time can invest more in their education, which further improves productivity and increases talent. Businesses also will receive a more educated workforce than can contribute to innovation.
  5. Improves Employee Retention: Employees will be least likely to leave in search for better pay if they are already making a living cost wage. Reduced staff turnover would lead to reduced costs spent for on-boarding and searching for new employees.

However, that doesn’t mean an increased minimum wage is a positive change for everybody. While large companies are often able to cover rising minimum wage increases, small business owners tend to suffer the most from large minimum wage increases as these increases tend to hit their profit margins harder.

Concerns of an Increased Minimum Wage

Some of the concerns surrounding an increase in minimum wage include:

  1. Unfunded Mandate: While the government dictates the federal minimum wage, it falls on the business to support it. Not every business can afford it.
  2. Increase Labor Costs: Raises in the minimum wage mean a raise in business labor costs…the largest budget item for most businesses. As a result, businesses may have to hire fewer workers which could drive an increase in unemployment rates. Low-wage workers are often hit the hardest.
  3. Increase in Outsourcing: To avoid the raise in business labor costs due to the raise in the minimum wage, companies may move certain facilities (and tasks) to countries where labor costs are lower or eliminate certain jobs and replace them with automated technology.
  4. Increase in Cost of Living: A higher minimum wage means employees can pay more for housing. This can result in landlords raising rents…creating more inflation.

The Minimum Wage Today

In recent years, while the federal minimum wage remains at $7.25, private companies and some states are already setting the stage for an implied minimum wage of $15:

  • Walmart, Target, and Amazon have set their national minimum wage to $15.00. Costco has gone up to $16.00.
  • Florida, Illinois, Maryland, Massachusetts, New Jersey, New York, Virginia, and the District of Columbia have approved raising their minimum wages to $15 an hour.
  • Washington, Oregon, Colorado, Arizona, New Mexico, Vermont, Missouri, Michigan, and Maine have plans to set their minimum wage between $12.00 to $14.75 an hour.

This unofficial national minimum wage of $15 seems to be a growing trend across industries. It remains to be seen how the U.S. government responds to this trend and how it will affect your own employee compensation strategies.

Learn more about Astron Solutions, who submitted this guest blog article.