HR Strategy

Riding the Wave of Minimum Wage

By

Aaron Santelmann

| Aug 4, 2014

Seattle recently adopted the nation’s highest minimum wage, raising an employee’s pay to $15 an hour. This represents a 60-percent increase from $9.25 and more than double the national average. Hold on – before anyone packs their bags to head to the Emerald City, finish reading.

This decision came soon after hundreds of employees from fast-food chains went on strike in hopes of forcing employers to pay a higher hourly wage. Although this more-money movement pushes to close the income-inequality gap and lower the poverty level, it may end up doing more harm than good. Even if minimum wages increase, small and large businesses alike threaten to release workers as a result.

The plan from Seattle Mayor Ed Murray would give companies with no more than 500 employees seven years to implement the new wages; larger companies would get three years. Whether the plan comes to fruition remains to be seen, but what businesses need to take away today is the value of each employee. As minimum-wage changes are implemented, companies will see their workforce drastically change, which directly impacts the value of their hiring process. Employers can use the increase in wages to their advantage, in order to create more revenue and a stronger overall business.

There are a number of things employers should understand as they move forward in this new per-hour era, but among the two most relevant are below.

  1. Everything is more expensive

 

The federal minimum wage is $7.25 an hour. In contrast, Seattle’s increase to $15 paints a bull’s-eye on organizations with high turnover rates. Research indicates the cost of firing an employee is, conservatively, 30 percent of his or her annual salary. When calculating full-time employees only, the payment cycle breaks down to:

  • $7.25 (federal minimum wage) x 40 (hours per week) = $290 a week
  • $290x 52 (weeks) = $15,080 a year

 

By these numbers, the off-boarding process can cost employers $4,524 per fired employee without breaking a sweat.

Managers realize how difficult it is to let an employee go, but they also understand the obstacles and costs of finding another suitable candidate. To replace anyone in your workforce is tedious and time-consuming. The on-boarding process involves paperwork, training and switching schedules to accommodate the newcomer’s lack of experience.

Although many may not notice, the minimum-wage level plays a crucial role in whether employers can afford to hire additional help. By raising the minimum wage to $15 an hour, the entire cost of the process is turned on its head. Below are the new numbers for employers to consider before taking action:

  • $15 (proposed minimum wage) x 40 (hours per week) = $600 a week
  • $600 x 52 (weeks) = $31,200 a year

 

The numbers never lie. Employers in Seattle will have to ask themselves if replacing one employee is worth approximately $9,360.

  1. You get what you pay for

 

From an employer’s viewpoint, one silver lining is that the door for new possibilities has been opened. The days of hiring the next person to walk in and scribble their name on an application are over. “Minimum wage” is synonymous with “minimal risk,” and as that figure grows, employers should realize that a candidate with only a high school diploma or GED may not be worth any risk. Raising the minimum wage allows managers to be more selective in whom they hire. In doing so, organizations can seize the opportunity to hire only those candidates who have the skills to rise up in the company, thereby granting organizations more assets, which in turn leads to business growth.

If the minimum wage should double nationwide in the coming years, managers also should double their efforts in hiring the right employees. Seattle’s situation already has demonstrated a ripple effect southward, as activists have gained ground in San Francisco and Los Angeles to raise the hourly wage to $12.82 and $15.27, respectively. Now more than ever, organizations and their management need to align their business practices with the changing pay landscape.

OK, now you can pack your bags. But don’t be naive: Raising the minimum wage to $15 may not necessarily correlate to a stronger economy. When it comes to the level of the minimum wage and the number of actual jobs, more could mean less.

About the Author

Aaron Santelmann

A young and enthusiastic writer and researcher, Aaron is an instrumental member of Paycom’s lead generation and reporting team. Aaron is an engaging writer who maintains a strong presence on Paycom’s blog where he focuses on politics, government and compliance, tax guidelines and other employer regulations that impact businesses across the country. Outside of work, Aaron enjoys reading, exercising and spending time with his family.

See more posts by Aaron Santelmann