Effects of a Minimum Wage Increase on Business

The minimum wage debate has been going on for years and continues to be a hot topic, especially when it comes to how a minimum wage increase affects business. Small business owners are divided on the efficacy of a wage hike, but some 2014 scientific opinion polling revealed that entrepreneurs may be trending toward supporting an increase to the federal minimum wage (to $10.10 an hour).

Many business owners indicated they believe it will enhance consumer spending, which might, in turn, increase the demand for their business’s products and services. They also believe it will ultimately strengthen the economy. Interestingly, 82 percent of small business owners surveyed already pay more than the federal minimum wage of $7.25.

Additional findings from the poll include:

  • 58 percent say raising the minimum wage would increase consumer purchasing power
  • 56 percent say raising the minimum wage would help the economy
  • 53 percent say businesses would enjoy lower employee turnover, increased productivity and customer satisfaction

So what are the effects of raising minimum wage? Well, the first and most obvious effect would be an increase in a company’s payroll costs. That can be scary to a small business operating with already tight margins.

Unfortunately, the cost of payroll tends to be what the small business owner focuses on, but it is only one piece of the big picture. For example, academic research has clearly shown that higher wages sharply reduce employee turnover. And the benefit of that fact alone is far-reaching. There are a plethora of obvious (and hidden) costs associated with a high turnover rate, including the cost of recruiting and training and the impact on employee morale and production. If a wage hike will increase employee retention, that would help offset the cost of high turnover.

To offset the cost of higher payroll expenses, businesses can look for other places to reduce costs. One way would be to find lower-cost vendors for critical supplies. Another could be to eliminate any unnecessary expenditures – trim the fat, so to speak. An additional way to help manage an increase would be to tighten up employee scheduling. Sending workers home during slow times is one way a service-based business could offset extra wage costs.

As a last resort, a small business can always raise prices to offset costs. But this strategy should only be used as a last resort since raising prices could jeopardize a business’s customer base.