Large Employers, Small Paychecks

While it's common to believe that small businesses are the primary employer of minimum-wage workers, a recent study suggests otherwise.

Monday, August 27, 2012
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New research is testing our long-held beliefs that small and mid-size businesses employ the most minimum-wage workers.

In fact, a new study from the National Employment Law Project suggests it is larger employers that employ the majority of minimum-wage level workers, and that these employers are realizing significant profits at the same time that the minimum wage remains stagnant and at a level that is now worth 30-percent less than in 1968. (If the minimum wage had kept pace with the cost of living since that time, it would be at $10.55/hr. It is currently at $7.25/hr.)

Charles Krugel, a management-side labor-and-employment lawyer and HR counselor in Chicago, agrees. Krugel represents primarily small to medium-sized businesses with anywhere from two to 500 employees, he says.

"The fact is, most of my clients pay a lot better than what larger companies pay," he says. "Moreover, I believe that my clients offer their employees as-good, if not better, benefits and working conditions than their much larger counterparts."

Case in point: the owner of New York Dog Nanny, Cynthia Okimoto, one of those small-business owner who believes in paying more.

"In our experience, minimum-wage jobs attract people with the lowest skill set, least investment in working hard in the long term as well as a high turnover rate," she says. "We can provide increased job satisfaction, decrease turnover and pull from a larger selection of candidates when we pay more than minimum wage."

What the study seems to indicate is certainly concerning.

Incomes Eroding as Big Business Profits

Paul Sonn, legal co-director with the National Employment Law Project in New York, says they were prompted to do the study because, "over the last few years, we've seen reports quarter after quarter that wage growth is flat or is falling in real terms and, at the same time, the minimum wage has been also flat and, therefore, has been eroding in real terms."

These trends, he points out, not only impact the incomes of low-wage workers, but can also weaken the economy overall. "It's one of the contributors to lackluster consumer spending, which is one of the reasons that businesses are nervous about taking on new employees," he says.

The message to HR: "We hoped that the message for HR professionals at these and other companies is that there is a bigger picture out there and that beginning to raise wages actually is not only something that most companies can afford because they're seeing decent profits, but if everybody does [it] then it will really help the economy overall," says Sonn.

Of course, given the lack of momentum on the parts of these companies to voluntarily boost their entry-level pay, there is movement afoot in Congress to raise the minimum wage. Senator Tom Harkin, (D-IA), Chair of the Senate Health, Education, Labor and Pensions Committee, and Representative George Miller (D-CA), Senior Democrat of the House Education and Workforce Committee, are proposing an increase to $9.80 by 2014, adjusted each year to keep up with the rising cost of living (which 10 states already do) and a raise in the sub-minimum wage for tipped workers.


Still, not everyone believes that raising the minimum wage is a good idea, or that this study even supports the relevance of these proposals.

Another Side to the Story

While Philip Noftsinger, business unit president at CBIZ Payroll in Roanoke, Va., says the information in the report is not necessarily incorrect, he says, "I think the way the information is presented leads, ultimately, to the wrong conclusion."

First, he says, the definition of small business in the report does not correspond to the Small Business Administration's definition. "The reader is presented with a case that essentially says that big business is sitting on top of the minimum wage earner and I don't think that the numbers really cut in that direction." The report, he notes, defines small businesses as those with 100 employees or less. But, he says: "The SBA, in manufacturing for example, uses 500 employees. So, that's literally five times what this report has chosen to use. That's one point that significantly calls into question the message that the report is trying to put out."

In addition, Noftsinger says, "I'm struggling with what their definition of a minimum-wage increase is. If they're defining it as a legislative action to raise the minimum wage, I don't think that that's fair." His point -- yes, employees may be hired at minimum wage, but there is no link between legislative action and what employers are actually doing in terms of wage increases. "I don't believe the data they're looking at indicates that employees have not gotten a raise since their initial employment date," he says.

Maryam Morse agrees. Morse, national reward practice leader of Hay Group's Retail practice, based in the Dallas/Fort Worth area, acknowledges that, while it may be true that the entry point to many of these jobs may be minimum-wage, employees move out of those entry-level jobs into other opportunities. In fact, she says: "What's positive about the restaurant and retail industries is that they actually provide an opportunity for people to make a career." Those that would have no chance of working in the oil and gas industry, or in IT, or finance -- those who may be significantly challenged -- can find a career path in these areas, she says.

"There are a number of retail and restaurant executives that are still what I would call home-grown," she says. "They came in, they were sales associates, they did a great job and they got promoted. I would venture to say that there's not one single retail boardroom that I work with that doesn't have someone who started in the stores who ended up there."

Morse also challenges the suggestion that employers of any size would try to hold wages down when profits are soaring.

"When I work with retail organizations, and that's where I spend about 100 percent of my time," says Morse, "none of them are thinking 'How can I pay my people less?' It's all about 'How can I pay them more? How can I create a more compelling experience?' " Morse says that Hay Group is working with a number of retailers on their employee value propositions and how they can make their organizations compelling places where people can come to learn and grow. "I've never had so many career pathing projects as I do now," she says. "Unemployment may be high, but there are always jobs for great talent.

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"I get where this (the report) is trying to go," Morse says, "but I will say that these companies are all trying to figure out how to pay more; they are not trying to figure out how to pay less. They care about their people; they want employees to stay. There is so much concern in HR right now; I get a call every day about turnover: 'What can we do about turnover? How can we keep our employees here and keep them happy and engaged?' "

The Role of HR

HR clearly plays a critical role in this equation.

"I think that, generally, employers and employees need to understand that whether we like it or not, our fates are inextricably linked," says Noftsinger. "With transparency and honesty, I think business leaders can find ways to create a culture that says 'hey, if profits are going up, then salaries should go up and they should celebrate that'.

"It's very important that when business wins, then all the employees that helped make it happen also take advantage of that win -- it's not just the shareholders or the owners."

That's the piece of the puzzle that the NELP report just doesn't address, he says. "I appreciate that the conclusions they draw are not incorrect based on the way they set up the data, I just don't feel that the way that the data is set up is a fair assessment."

In response to reports like this one, Morse says, HR has an opportunity to communicate with employees about their pay practices and employee commitment.

Morse stresses that HR needs to be talking about the opportunities within their organizations and the successes that staff have had -- not in a reactive way, but in a proactive way. "That's really the responsibility of HR," she says. "It's almost like HR marketing."

More to Come

The issue of federal and state regulation of the minimum wage is always a contentious one with valid views on both sides of the issue. The Economic Policy Institute, for instance, estimates that the Harkin-Miller proposal would generate more than $25 billion in new consumer spending, which would result in more than 100,000 new full-time jobs and that the wages of one-fifth of the workforce -- about 30 million Americans -- would rise.

But, Noftsinger says that: "I think Congress knows -- just as the economists that they're probably going out and consulting with -- know that, if you go out and raise the minimum wage at this point it would probably have a counter-effect on employment. I don't think that that's good fiscal policy in today's environment."

With a national election on the horizon, this is an issue that is likely to rise to the forefront and generate additional discussion and debate.


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