Meeting the New Minimum

More than half of U.S. states have increased their minimum-wage levels since last year. Experts discuss what effect such mandates might have on the greater labor market.

Wednesday, February 22, 2017
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On Jan. 1, 19 states began implementing minimum-wage hikes for their workers, one year after 13 other states enacted similar mandates. While economists say it could take years to determine the effect these increases have had on the labor market, one expert warns that many companies in those states may be tempted to downsize their workforce as a result.

“Most companies endeavor to pay a competitive wage to lure talent and ensure employee loyalty,” says Rob Wilson, president of Chicago-based Employco USA. But, he says, industries that operate on very thin profit margins -- such as retail and hospitality -- will experience "a direct and negative impact on businesses and their workers" as a result of the hikes.

"Minimum-wage increases have caused many people to lose their jobs across the country,” he says.

While the percentage of Americans in the workforce who earn minimum wage is only 1.8 percent, Wilson says, “minimum-wage jobs have traditionally been employment opportunities for young adults and teens just entering the workforce. When minimum-wage jobs go away, inexperienced workers suffer as a result.”

Indeed, research by economists Jeffrey Clemens and Michael Wither, of the University of California-San Diego, finds that minimum-wage increases were responsible for 14 percent of the job losses between 2006 and 2012.

But Clemens, whose earlier academic work involved tracking low-skilled workers' employment trends as the federal minimum wage rose from $5.15 to $7.25 in 2009, says these new state-mandated minimum-wage increases might not have the same effect as the federal bump.

“Because those changes took place in the context of the Great Recession," he says, "I would expect the effects of minimum-wage changes enacted during the current economic expansion to, at least initially, be much smaller.”

While acknowledging that it's unlikely the Trump administration will make any move to increase the current federal minimum wage, Wilson says that, if “$15 becomes the new minimum wage, there will be a ripple-up effect, as the workers above the minimum-wage rung will want a raise as well."

This is when HR should be more efficient and effective with performance reviews, he says, adding that it's important for HR departments to have effective internal communications processes in place.

"Look at how you're managing personnel and what your budget can afford," he says. "For multi-state companies, this becomes an even bigger issue, because their minimum wages will vary.” 

Meanwhile, Rick Guzzo, co-leader of Mercer's Workforce Sciences Institute in Washington, says a majority of states have exceeded the federal minimum wage and are on a glide path toward increasing their minimum wages in the coming years.

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“These are planned changes that have been legislated or adopted by ballot and have three-to-five year horizons to change the minimum wage up to the target wage,” he says, adding that many municipalities have their own minimum wage, which will typically exceed the minimum wage in that state.

However, the suspension of the Obama administration's “overtime rule” means employers will avoid an estimated $10 billion addition to their payrolls, Wilson says. “With the current Republican administration, I don't see the overtime rule being enacted.”

Nonetheless, the pressure companies are experiencing to pay more is an opportunity to think about how compensation fits with the other aspects of the compensation package, says Guzzo.  Employers must examine perks, such as flexible scheduling and other benefits connected to the wage rate.

“Employers should think about ways to make the overall proposition really good to avert the problem of unsustainable costs or high turnover,"Guzzo says. "There are ways to make that value proposition reasonable and accommodative to the employee, because when employers pay more, they get more.

"Higher wages aren't only a cost," he says, "they can sometimes return more value to the employer than paying less.”

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