Measuring the Minimum-Wage Effect

New research from the University of Washington looks at the effects of Seattle's minimum-wage increase, and early results show that local prices have not risen as previously feared. Experts discuss how raising the minimum wage could affect businesses in other ways.

By Jill Cueni-Cohen

The federal minimum wage, currently $7.25, hasn't been raised since 2009. But states, cities and some companies have already taken the initiative to raise their minimum wages. Meanwhile, the debate about whether raising the minimum wage will have a positive or negative effect on local economies rages on, as two major cities, Seattle and Los Angeles, have mandated that employers pay at least $15 an hour.

The first results from a study by researchers from the Univ. of Washington on Seattle's minimum-wage increase suggest that initial fears about price increases being passed down to consumers were unfounded. But more time is needed to make informed decisions, according to Professor Jacob Vigdor of University of Washington's Evans School of Public Policy and Governance.

"Our team hopes to develop a full understanding of how businesses and nonprofits change their practices to accommodate higher wages," says Vigdor, "and of whether a higher minimum wage meaningfully transforms lives." 

Companies in affluent areas such as Seattle are finding that there's a social value to paying employees a "living wage," but this is much less of a consideration in poor communities, says Vigdor, pointing out that different industries see different effects. "Prices remained the same in retail sectors such as grocery and drug stores," he says, adding that consumers are experiencing higher costs in local restaurants. "Nobody uses low-wage workers as intensively as the restaurant industry does. On the other hand, a bookstore might have millions in inventory but doesn't need lots of employees."

Rick Guzzo, a partner in Mercer's Workforce Sciences Institute, says employers can learn better business practices when they investigate the effects of a higher minimum wage. "This is a good reason to re-think how work gets done [in your organization] and how to enable higher performance," he says, adding that raising workers' wages can pay off in higher productivity. "There are plenty of examples in our client experience that demonstrate the value. To some extent, the more you pay as an employer, the more you can require of your employee."

http://www.hreonline.com/images/ThinkstockPhotos-473631120minwageL.jpgGuzzo advises employers to research possible outcomes regarding employee turnover, sales results, customer satisfaction scores, among others.

"Is there a business case for paying at a higher level or is the nature of the work such that an organization needs to comply with local requirements? You should be making an informed choice using that data," he says. "As crazy as it may sound to some employers, this is actually an opportunity to optimize compensation, be more productive and improve your bottom line as a result."

However, implementation of the wage change does have certain challenges. "Many questions need to be addressed," says Guzzo, including how quickly a company can move to a target wage and which employees are eligible. "There's also a public face to this, and companies for whom brand is paramount to business success are most likely to get ahead of the curve because it can reflect favorably in the eyes of their clients. For instance, Wal-Mart -- which is a closely watched company -- has said that they're going to pay their employees above minimum wage."

Ikea is another large company that has announced its intention to pay its workers a living wage. "In order to do this, they must determine what that is in each community where they have stores," Guzzo says, adding that declaring their intent to pay a living wage is consistent with Ikea's brand and image. "That's a reason to take action in terms of compliance."

The National Federation of Independent Business is made up of 350,000 small and independent business owners. According to National Media and Communications Director Jack Mozloom of the organization's Washington office, government mandates over issues like wage increases and paid sick leave will hurt small businesses. "I resent the implication that businesses aren't doing the right thing," says Mozloom, noting that the playing field changes with larger companies.

"Large companies can invest in technology and replace people, or they can locate their headquarters somewhere else. Our members are mostly family-owned businesses, and they don't want to lay anyone off," Mozloom says. "There's a line they can't cross which is different for every business and circumstance, and blanket mandates distort the market place and hurt small businesses . . . which will either disappear or can't grow. These mandates are made by the same politicians who say they want job growth.

"Business don't need to be told what to do," he adds, noting that states where minimum wages are being imposed -- including California, New York, New Jersey and Connecticut -- places where small businesses are hurting the most. "Those places make it hard to open, maintain and grow a business if the government forces you to spend more without a connection to sales."

Send questions or comments about this story to hreletters@lrp.com.

 

May 23, 2016
Copyright 2017© LRP Publications