Wages have been a contentious issue even before the United States national minimum wage was created by an act of Congress in 1938. Today, as more and more states get closer to a $15/hour minimum wage, the federal wage remains $7.25/hour, the national minimum established in 2009. This disparity raises questions about what a livable wage really is in 2022. There are also questions about how minimum wages affect small business owners, an increasing number of whom are women.
Where should a minimum wage land?
Deciding on a single national minimum wage can be difficult as the cost of living varies greatly from one region to another. Regardless, the federal minimum wage of $7.25 created in 2009 still means that a full-time worker falls well below the national poverty level. According to research by the Economic Policy Institute, today’s federal minimum wage has 17 percent less buying power today than in 2009 and 31 percent less buying power than it had in 1968. The minimum wage, at least at the federal level, has been overtaken by inflation.
However, in recent years, many states have begun increasing their minimum wage incrementally. Many are creeping ever closer or all the way to a $15/hour minimum wage. Some states remain stuck at $7.25. Recently, the Massachusetts Institute of Technology created a tool that calculates the living wage in a certain geographic area. It found that the living wage in many places is far higher than the minimum wage. For example, the tool determined that the living wage for an individual with no children in the MetroWest Boston area in 2019 was $19.17, while the minimum wage at the time was $12.75. While the minimum wage has grown, the cost of living has grown as well. Without a drastic increase, the minimum wage will continue to lag behind the increasing cost of living.
How do minimum wage increases impact women in particular?
According to Women Employed, a 501c3 focused on wage equity for women, women make up a huge percentage of minimum wage workers. “Contrary to popular conceptions, the majority of minimum wage earners are not teenagers. Roughly 80 percent are adults – almost two-thirds are women – and most are working to support their families. Women of color are overrepresented in minimum wage jobs. While they make up 17 percent of the population, they are almost a quarter of minimum wage workers.”
The restaurant and foodservice industry is the biggest employer of low and minimum-wage workers. Almost two-thirds of all food service workers are women. Almost half the minimum-wage earners work at a business with fewer than 100 employees, and 40 percent work at companies with fewer than 50 employees.
On the other side of the bargaining table sit business owners. The vast majority of women-owned businesses fall into the small or very small business category.
Either way we look, women are over-represented in the conversations around minimum wage.
A mandated minimum wage needs to balance a living wage and the needs of the business community, particularly small businesses. A fair minimum wage needs to allow businesses to grow, earn profits and put that profit back into the economy.
How do rising minimum wages help small businesses?
Rising minimum wages will affect small businesses. How detrimental those effects depend on the business and the extent of the wage increases. We asked women who are small business owners what effects rising minimum wages have on their businesses. Their answers were, unsurprisingly, quite varied.
Annie Singer, Founder of Reciple, an online recipe platform, says, “A rising minimum wage is only a threat to small businesses that do not have strong systems, processes and automation in place. If a task isn’t worth a living wage, it should not be done by a human.”
Other entrepreneurs echoed Singer’s position. Courtney Sunborn owns Ecolistic Cleaning in Delaware. The state is incrementally increasing its minimum wage until it reaches $15/hour in 2025. She said, “Paying my employees a living wage is the best business decision I’ve ever made. When my employees are happy, so are my customers. Lower employee turnover means I save on hiring and training costs.”
Many small business owners think a rising minimum wage only helps businesses. They cite improvements to employee retention, work ethic, more money circulating through the economy and happier employees and customers.
What threats do rising minimum wages pose to small businesses?
On the flip side, not all small businesses are prepared for rising minimum wages. Some see an increase in minimum wages as impacting their ability to support the next generation of professionals. Elisa Bender, co-founder of RevenueGeeks, said, “My business is still fairly small, and utilities and other management expenses are always increasing. Those costs are why we cannot pay interns.” Other businesses also mentioned intern pay when discussing minimum wages.
For these businesses and the communities and economies they are a part of, rising minimum wages can have a domino effect. Not being able to pay interns or offer as many full or part-time junior positions hurts job growth and can be discouraging to young people joining the workforce. Nobody wants to work for free, but some businesses feel that’s all they can offer interns if the only other option is an increased minimum wage. This could make it more difficult for younger people to get the experience required for higher-paying full-time jobs.
What are the benefits and drawbacks of paying workers more?
According to a study by Pew Research, a majority of Americans, about six-in-ten adults, are in favor of increasing the minimum wage to $15/hour. Despite this, such a drastic increase may be hard to get enough votes for in Congress to pass. When asked, 54 percent of Americans said that the minimum wage should be increased even if it’s to less than $15/hour. While the end goal is $15/hour, the feeling is that any increase is an improvement at this point.
Many advocates of a higher minimum wage point to higher employee satisfaction as an outcome of higher pay. Several positive effects fall under the umbrella of employee satisfaction. These include higher employee retention and in turn fewer hiring and training costs. According to research by Warwick University, happier workers are about 12 percent more productive than unhappy workers. The productiveness of workers and the quality of work have a direct impact on the success of all businesses.
Giving the average worker more purchasing power is a good thing, but it can also have negative effects. Inflation is inevitable, and as workers are paid more, prices for basic things like rent will increase over time. The goal is to balance the wish for livable wages for workers with keeping inflation in check and supporting the needs of small businesses.
How can small businesses better prepare for the future?
Every small business needs to assess its organizational structure as the minimum wage increases. Being properly prepared and able to adapt to future increases is the key for all small business owners and will allow their businesses to survive and thrive.
There are many ways businesses can prepare themselves for increasing minimum wages. Here are just a few:
- Stay informed and budget for upcoming increases. Forecast what impact an increased minimum wage will have on your business. Know your numbers.
- Stay ahead of anticipated increases. Raising your wages ahead of competing businesses can help you be more competitive when it comes to hiring. Don’t wait until everyone else raises their wages to raise yours.
- Automation is one way to make your workforce more productive. Automating tasks frees employees to spend their time more productively. More productive employees can make a business more profitable or allow you to expand your offerings and grow revenues.
- Train your employees better. It may be counter-intuitive, but increasing your budget or employee training allowance cuts future recruiting and training costs and can help you retain employees longer, improve productivity and positively impact your bottom line.
- Consider NOT hiring minimum wage employees at all. Can you restructure your business to move away from using lower price workers? While more senior, salaried staff would increase staff costs, you may find that the level of service delivery more than makes up for it.
We expect minimum wages to increase, hopefully to provide a living wage for every worker, and we expect inflation to continue. The businesses that plan ahead for these increases will survive longer and thrive. Those businesses that react or ignore the coming changes may fall irrevocably behind.