The federal minimum wage, and those mandated by states and localities, represents a requirement for the floor for payment that employers must offer. However, the minimum wage does not always line up with the cost of living in a given area, nor do real wages necessarily rise with productivity or profits.
Many business owners are necessarily concerned with expenses, and fear raising wages could put too much pressure on the bottom line. However, paying employees what is known as a "living wage," or one that meets the demands of the cost of living in their community, tends to produce better business outcomes and improve employee performance. Much like paid leave policies, a living wage can be viewed as an investment, rather than just an expense.
Calculating a living wage
What exactly is a living wage? It is a per-hour rate that each working adult in a household requires to meet the typical expenses for essential goods, like food, medical care, housing, transportation, and so on. The values for living wage vary depending on the size of the household, its composition of adults and children, and current location. So, for example, the living wage will be very different for a Seattle family of four with two working adults and two children than it would be for a single adult living in New York City.
"When you're setting something like the federal minimum wage, you want to consider the averages," said Holly Sklar, CEO of Businesses for a Fair Minimum Wage, an advocacy group which supports gradually raising the floor. "When talking federally, it's a floor that's adequate for the country as a whole. When you're talking about an individual, or city, or a state, you look closer to home to determine what is living wage."
So, if a business owner wants to offer a living wage to its employees, how could they know what is their target number? The Massachusetts Institute of Technology (MIT) developed a living wage calculator that covers every county in every U.S. state. The calculator shows what a living wage is for households of varying sizes as well as the local poverty wage and minimum wage. The average living wage for the U.S. as a whole in 2017, for example, was $16.07 per hour before taxes for a family of four, including two working adults and two children.
In the case of this writer's home of Middlesex County, New Jersey, the current state minimum wage of $8.60 per hour does not meet the standards for a living wage for a household of any size. The household with the lowest wage needs – two working adults – requires a wage of $10.93 per hour to be considered as making a living wage. Of course, employers can and often do choose to pay more than the mandated minimum wage, but they are not required to do so.
The legal and economic landscape
Currently, the federal minimum wage is $7.25 per hour. States and localities have their own wage legislation in place as well, sometimes mandating more than the federal standard. Washington, D.C., boasts the highest minimum wage in the U.S. at $12.50 per hour, followed closely by Washington state at $11.50 per hour, and California and Massachusetts at $11 per hour. Some states, on the other hand, maintain no minimum wage, like Alabama, Mississippi and Louisiana. In these places, the federal minimum wage applies.
It's worth noting, though, that the federal minimum wage has actually lost about 9.6 percent of its purchasing power since its peak in value in 1968. If the minimum wage had tracked inflation since then, it would have been roughly $8.68 in 2016. If the minimum wage had tracked the immense increase in productivity since the late '60s, it would be more than $20 per hour. Today, 29 states, plus D.C. and more than 20 cities, have raised the minimum wage beyond the federal minimum to account for the inflation-driven decline in minimum wage value.
However, also worth noting is that the minimum wage does not represent average wages, which have, in fact, risen over time. According to the U.S. Bureau of Labor Statistics, the median annual salary of a U.S. worker in the final quarter of 2017 was $44,564. For a full-time, year-round worker, that breaks down to about $21.43 per hour, well above the average living wage in the U.S. for 2017. The overall value of those wages, though, has remained level since the 1960s; in other words, while the nominal wage has risen for the average American worker, the purchasing power of those wages has remained largely stagnant.
Added expense or workforce investment?
Once the legally required minimum wage has been met, businesses can choose to set compensation at any rate they'd like. In general, there are two main schools of thought. Sklar and her organization believe offering a living wage (and, indeed, raising the mandated minimum wage) will yield the most positive outcomes for both individual businesses and in the economy at large, while others believe wages and compensation packages are purely a consideration of supply, demand and profitability.
"It is reasonable to assume that most employers, particularly small businesses, want to pay their employers a fair and sufficient living wage; however, with or without this motivation, this becomes a function of basic economics," said Rob Drury, executive director of the Association of Christian Financial Advisors. "To attract, maintain, and motivate quality employees, a business must compensate appropriately, and I use the term 'appropriately' rather than 'fairly' to emphasize that the living wage figure eventually comes down to a natural market equilibrium of supply and demand, rather than a subjective evaluation of 'fairness.'"
In other words, the market will set the appropriate level of compensation. Pay too little, and you won't be able to attract the right talent; pay too much, and you could find yourself hemorrhaging money. On the other hand, Sklar points to long-term benefits of paying employees more, which she said might result in lower growth quarter over quarter, but would be more effective in retaining employees, boosting morale and increasing long-term productivity.
"One of the things our business members stress is looking at the whole picture," Sklar said. "Low pay often means high turnover, and with a reduced turnover [due to higher pay], businesses often see substantial savings in recruiting and training costs. There are also savings from managers able to spend time on more productive tasks, as well as less product waste through lower error and accident rates."
Sklar added that customer service tends to be significantly better when wages are higher, resulting in a happier, more loyal customer base.
"We know that frontline employees often make the difference between repeat customers and lost business," she said.
Considering offering a pay raise?
While you are under no obligation to compensate your employees beyond legal requirements, depending on your situation, it might be a wise investment. If you're considering raising your employees' compensation to a living wage or higher, run a cost-benefit analysis to see what you can reasonably afford without breaking the bank. Sklar suggests slowly phasing in pay increases to test the waters, rather than dramatically ratcheting up the payroll overnight.
There are also many things you can do to pad employee compensation without raising wages. For the business owner who would like to offer something more but can't quite afford a large-scale pay raise without over-burdening margins, Drury suggested leveraging benefits packages to boost employee compensation for a lighter expense.
"Total compensation is an important principle, as most employees will look at how the whole package rewards them," Drury said. "Benefits packages can provide effectively greater compensation at a lower cost."
Here are a few of the benefits and perks you could offer employees in lieu of (or in addition to) a pay raise if you're so inclined:
- Traditional benefits packages: Of course, employees are often on the lookout for comprehensive benefits packages, including medical, dental, and vision insurance as well as other kinds of insurance like life, disability, and even pet. Retirement plans, like 401(k)s, also fall into this category. Offering some of these options can make your total compensation package even more attractive.
- Paid leave policies: Paid leave policies offer employees paid days off for vacation time, sick days, or family care. Some forms of leave, like family leave, are even supported by the employee and the taxpayer, representing a benefit you can offer without any added expense.
- Telecommuting policies: Telecommuting policies are a great and cost-effective perk to offer employees if the nature of your business allows it. Granting workers a few days to work from home each week – or allowing them to work fully remote, if you'd like – is not only a desirable and flexible arrangement for the worker, but it can save you costs on physical space as an employer.
- Professional Employer Organizations: PEOs are a great way to offer your employees benefits and HR solutions at a lower cost than providing them on an individual, company-to-company basis. PEOs pool the resources of many businesses within their network, creating an economy of scale and providing lowered rates to members.
Salaries, wages and compensation are the most important incentives for your employees, so it's essential that you offer an attractive enough package that your employees aren't stressed about making ends meet.
While every business has to manage costs and remain profitable, a happy worker is a productive worker, and a productive company is a healthy one. Whether it means offering a "living wage" or adjusting compensation to ensure employee happiness and boost labor market competitiveness, sometimes it's a worthwhile investment to pay a bit more to your employees upfront.
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