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How Small Businesses Are Affected by Minimum Wage

How Small Businesses Are Affected by Minimum Wage

How can small businesses remain competitive as minimum wage increases and big companies offer more money to employees?

  • 29 states and Washington, D.C. have minimum wages that are higher than the federal minimum.
  • 46 cities and counties have minimum wages that are higher than their state’s minimums.
  • Research shows that raising the minimum wage does not kill small businesses and reduce job opportunities.
  • This article was written for small business owners who wish to understand how increasing minimum wages could impact their business and how they can absorb them.– You might be tempted to believe that employees make more today than they did in 1969 if you compare their paychecks with those in 2019. But, for decades, the purchasing ability of the average American worker was largely static.

This could be changing with scattered increases in minimum wages across the U.S. Many states have increased their minimum wage slightly, while some cities have raised their minimum wage to $15 an hour.

Even in cities that do not raise the minimum wage, there is often upward pressure on the compensation. To attract the best talent, small businesses may need to raise wages. [Related Content: For How Long?

What are the implications of rising wages for small businesses? And what can they do to remain compliant with law and compete with larger companies?

Changes in minimum wage laws at the state and local level

The minimum wage in 29 states and Washington, D.C. is currently higher than the $7.25 an hour federally required minimum. Since January 2014, 27 states and D.C. have raised their wages. This has meant that many businesses have had the need to adjust.

California and Massachusetts have the lowest minimum wage rates at $15.20 an hour. D.C. is close behind. California’s minimum wage rate is $14 an hour for companies with 26 employees or more. For smaller businesses, the equivalent is $13 an hour. California is closely followed by Massachusetts and Washington, where the minimum wage is $13.69 and $13.50 respectively.

46 cities across the country have also adopted minimum wage rates that are more than those of their states. Emeryville in California has the highest minimum wage. Employers are required to pay workers $17.30 an hour. Seattle, Washington is close behind with a minimum hourly wage of $16.69.

These cities have enacted legislation to increase the minimum wage. Small businesses must comply or risk being sued and enforcement actions. Is your small business searching for a better way of managing payroll? Our reviews of the top payroll software are available. ]

What does an increase in minimum wages mean for the economy?

Increased minimum wages are a sign that they have an economic impact. Increased minimum wages have many positive economic effects.

  • Higher employment rates: Watching the news in 2021 led to a lot of stories about ” labor shortage.” It is possible to see a different picture by listening more closely to workers. Reporters who did this have discovered that people are available to work. They are becoming less interested in work that doesn’t pay fair wages. This concern is addressed by increased minimum wages, which boosts employment.
  • Increased consumer spending: Employees who earn more can spend more. This increases the economy’s ability to spend more, which in turn stimulates it. More spending means more money goes to smaller businesses. This results in local economic growth.
  • Lower poverty rates Workers who earn more have the opportunity to increase their basic needs budgets. This can have a significant impact on people living in poverty. People living in poverty can earn more through their jobs, which allows them to afford food, housing, and other necessities. Your small business can only benefit from a lower poverty rate.
  • Long-term potentially lower taxes: Because increased minimum wages can help people in poverty to escape poverty, they can also reduce their dependence on government programs. These programs can be cut by governments. These programs will require less tax money to be funded if the budget is smaller. This can lead to a lower overall tax burden for all taxpayers, even small businesses.
  • A more diverse workforce: The median household income for most marginalized groups, is lower than the national median income. These discrepancies often result from unconscious and conscious biases of employers. These pay gaps shrink when employers have to pay a lower minimum wage. Employers may make marginalized groups feel more motivated to enter the workforce if they increase their minimum wage. This results in a more diverse workforce across all sectors, if they are not already. Diversity hiring is an essential part of any workforce.

What does a minimum wage increase mean for small businesses?

There are many misconceptions about minimum wage increases, especially for small businesses. Economic research on the effects of minimum wage increases on small businesses shows that they are not harmful. In fact, some studies have even shown that they can be beneficial.

The Fiscal Policy Institute studied three years of small-business activity in states with higher minimum wages than the federal standards. It also examined states that didn’t. These are some of the findings from the researchers:

  • The number of small businesses grew by 3.1% in the states with higher minimum wage rates, and 1.6% in those with lower minimum wages.
  • In states with higher minimum wage, employment grew 1.5% faster.
  • The average annual payroll and the average worker’s payroll grew faster in states that have higher minimum wages.

This data shows that the idea that minimum wage increases kill small businesses and decrease job opportunities is false. Raising the minimum wage appears to increase entrepreneurs’ ability to start new businesses or hire workers. Additional research in the Journal of Economic Issues showed that minimum wage increases did not correlate to an increase in small-business failures. Research even suggests that the reverse is true.

However, any increase to the minimum wage will have an effect on small businesses’ balance sheets. Although there may be some positive aspects to increasing the pay of workers, small businesses need to be able to absorb the cost. An entrepreneur has several options to reduce costs and increase revenue to offset wage rises.

How can small businesses absorb the higher costs of minimum wage increases

Many small businesses don’t have the budget to cover increased labor costs. It’s crucial to be prepared for new legislation. How can small businesses prepare to pay a higher minimum wage? You can bring more money into your business and/or reduce the amount that is going out with one or more of these strategies.

  • Cut expenses. You may have the option to reduce expenses if you live in a city or state that plans to increase the minimum wage. As you prepare to absorb these costs in small increments, take a look at every aspect of your business. Are there areas of waste or inefficiency that you could eliminate to save money? Think about things like energy consumption, excess inventory, and service contracts. You can reduce unnecessary expenses to absorb new labor costs and streamline your business operations.
  • You can raise your prices. Consider raising your prices if you find yourself in a competitive market. Communicate with your customers about what you expect before raising prices. To ensure that your customers aren’t looking for cheaper alternatives, compare what your competitors are charging. You should be cautious when raising prices. However, if you have the budget, adding modest budget cuts to price increases could help free up capital. [Read similar article: Low prices can scare away customers?]
  • Reduce your hours. Reduce your hours if it is difficult to offset an increase in minimum wage. Do you have a business that is open during peak hours? To save money, identify the times when your most revenue comes in and adjust your operating hours accordingly.

It can be difficult to plan for the cost of an increase in minimum wage, but it is possible. This is especially true when you consider that many cities and states raise the minimum wage over time, giving businesses a chance to increase their compensation gradually rather than expecting them to dramatically increase hourly earnings overnight. Some businesses include regular, voluntary wage increases in their budgets, regardless of whether they are located in a region with increasing minimum wages.

Small businesses can increase their pay voluntarily

Small businesses are also facing a situation where their biggest expense, labor, is increasing due to market forces. Many employers are in dire need of workers after the Great Resignation, particularly mid-career employees who have developed skills or experience. This gives job applicants significant leverage when it comes to negotiating salary and pursuing other offers.

Businesses must offer attractive working conditions for job seekers to remain competitive to talent candidates. This often includes better pay than their competitors.

Andrei Vasilescu is a CEO and digital marketing specialist at DontPayFull. Many business owners understand the importance of staying competitive in order to retain their top workers and attract the best talent. Vasilescu offers both automatic annual wage increases and a mid-year bump.

He said, “I have a small online company that requires a team of tech-savvy smart people to program, design, market digitally, and sales analysts.” “None of these professionals earn basic wages and they are always sought after by other companies. To retain them in my company, I must give them something more.”

Employees who are well-paid are less likely to quit, which reduces turnover. Retention is crucial in a business environment where replacing employees can cost between $2,000 and $7,000. This is not to mention the negative impact on morale if there is high turnover. Losing valuable employees in a competitive labor market is an expense that most businesses can’t afford.

Corporate social responsibility: A perspective

Wage increases are not always driven by a bottom-line motive. Businesses may raise wages voluntarily because they believe that their employees deserve a living wage. This is more than the current labor rate.

Coastal Credit Union is one such company. It is a cooperative organization and is headquartered in Raleigh North Carolina.

Joe Mecca, Coastal’s vice president for communication, stated that “as a cooperative, and a responsible corporate citizen it was necessary to assume the initiative to ensure our employees are able earn enough to take good care of themselves.” “Coastal places employee engagement at its core, and we believe that it is just as important as member satisfaction or overall business performance.

Coastal increased its minimum wage from $12.50 an hour to $15 in March 2016 to $15 in March 2018. Coastal was primarily concerned with employees but has since recognized the benefits of paying employees a living wages: lower turnover, increased employee engagement, and a boost in productivity.

Mecca stated that it is not only socially responsible, but also makes good business sense. According to our experience, raising the minimum wage is a worthwhile move. We are enjoying high levels engagement which improves member satisfaction, productivity, and overall financial results. [Read similar article: What is Corporate Social Responsibility?

Planning ahead can help you get higher minimum wages

While everyone wants expenses to rise, business owners know the importance of investing in valuable assets. Small businesses have no greater asset than its employees, so it is important to consider their wages as an investment. In states and cities that have minimum wage increases, raising compensation can be a compliance issue. Paying higher wages does not have to be negative. In fact, it could be a good thing.

If small businesses want to reap the rewards of employee retention, recruitment and morale, they must be able to bear the increased minimum wage costs. A rising minimum wage can be avoided by optimizing business hours, cutting unnecessary costs, raising prices, and increasing profits.

Many small businesses who are able to navigate minimum wage increases successfully find themselves in an economic healthy environment, where consumers have more disposable income to purchase goods and services. They also have more productive, loyal employees who are happier and more productive. Plan accordingly and minimum wage increases won’t be an obstacle. They can be a benefit to both your company and your employees.

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