Did you know that half of the country has approved new minimum wages for 2021, with more wage increases to come in time?

The purpose of this commentary is to discuss the sweeping minimum wage changes happening in many states, and the potential consequences resulting from those changes.

A long time ago in our country, our leaders thought it would be beneficial to initiate a minimum wage for all. The year was 1938, and the amount was twenty-five cents an hour, or the equivalent of $4.50 in 2020 dollars. The current Federal Minimum Wage is $7.25. Should it be more, or should we even have a minimum wage? Fortunately, we aren’t going down that rabbit hole, but we should prime our minds on how things started before we dive deeper into this complex topic.

Let’s compare buying power between the two time periods, as a lot has changed:

	1938	2020
Gallon of Gas	$0.10	$2.60
Movie Ticket	$0.25	$7.50
Postage Stamp	$0.03	$0.55
Average Rent	$27.00	$1,588.00
New Car	$866	$37,851
New House	$3,900	$280,000
Average Income	$1,731	$74,378

 

The 1938 costs were radically less and also occurred in the middle of the Depression. Our eyes affix upon the new housing prices on this list, as they have moved much faster than wages, quadrupling average income as compared to a much lower multiplier back in 1938.

Why does this matter? Perhaps because the term ‘affordable housing’ is often used as the premise for increasing the minimum wage. We have all seen and heard how someone earning minimum wage cannot afford rent or buy a house. The examples above share a less than 10% increase in rent as a percentage of annual salary, and we are at $7.25 nationally versus the 2020 amount in similar dollars of $4.50 which more than covers the increase at national average levels. Perhaps the disparity focus is on new houses as a premise to increase minimum wages if we only consider what is on the list above. Ideally, the list should include the many things we have now that we didn’t have back in 1938 to complete the picture, like our internet, cell phone, various other subscriptions, and more. But what of those many things are wants, and what are needs? Clearly, not an easy comparison when all things are considered. It is also important to note that housing comparisons may be more effectively compared at the cost per square foot, as some 1938 houses would pale in comparison to the more modern designs of today. We shared bedrooms, bathrooms, and almost everything else not too long ago. Not to mention the current trends in housing including homeschooling space, office space, gym space, the en suite, and open floorplans with high ceilings. The 1930s were certainly much different and had fewer code requirements.

Diving Deeper

The debate on whether to increase the minimum wage or to let the market decide is a very complex discussion with incredible substantiation on both sides to support each viewpoint. The next discussions are perhaps the most relevant ones and are the most needing of our immediate attention. Some conversations may include questions such as: What do these changes mean for our company? Do we raise entry-level wages to meet the new minimums as they phase the changes in, or do we get ahead of the curve to the targeted final wages to bypass the data lag? Do we raise all non-exempt wages to avoid compression issues? Should we develop more cross-functional teams and reduce entry-level roles that are now less cost-effective? Should we outsource where possible? Should we incorporate and/or leverage more technology to reduce the need for entry-level roles? Can we change benefit offerings for entry-level roles to accommodate the higher wages? Would a good strategy to mitigate the labor cost increase be to offer lower (or no) annual increases for a period of time or would that make matters worse? Will we and others be forced to pass increased labor costs on to the consumer? Will remote workers from other states with lower minimum wages be able to take entry-level roles within high-minimum-wage states to help contain costs, or will we see a migration in the workforce to states with higher minimum wages as a result? How will we afford any of this?

Change is constant with compensation. It is paramount for long-term success to have access to actionable business intelligence and provide leadership with the tools, reports, and the most accurate compensation information in a timely manner.

These are just a few of the questions that come to mind when considering the ramifications of higher minimum wages. The good news is that the market demands have always outpaced the minimum, so many places have already been paying more than the minimum as a result. Because of this, if you are market competitive, you will have little to no changes to your compensation plans as the market will have pushed ahead of the minimum years ago.

Others are not as fortunate and may have to make more significant changes in many areas. Some may have higher variable compensation paired with lower-than-market base compensation, while others have touted higher-than-market benefit packages and possibly less-than-competitive base and/or variable compensation. As a result, some adjustments can be made to accommodate the new minimums, but that may cause some concern with the team, as not everyone values the same things.

Change is constant with compensation. It is paramount for long-term success to have access to actionable business intelligence and provide leadership with the tools, reports, and the most accurate compensation information in a timely manner. If corrections need to be made, what data is used to determine the change? How are hybrid roles not typically found in data addressed? If starting wages increase, what can be done in matrix planning to mitigate potential compression and resulting morale and engagement issues? As a strategy, what level of transparency is desired with compensation? These and many more compensation questions will arise as the complex landscape of compensation continues to change.

Are you ready for what the future holds? Find out what is possible with BalancedComp!

 

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