How Paying Minimum Wage Costs Businesses in the Long Run

Source: Thinkstock

Source: Thinkstock

Many businesses skate by on razor-thin margins, constantly working and reworking the dynamics of its organizations in order to find the proper balance of spending and resource allocation. One of the fundamental tenants of business is to keep your costs low so that you can increase your margins and gain more profit. Cost-cutting can include anything and everything — from finding a cheaper supplier, to using new materials for your products. Unfortunately, cost-cutting also applies to wages, which is why there are basic minimum wage laws.

Many people — often those who are quick to identify themselves as ‘free-market capitalists’ — detest minimum wage laws. There is a belief that labor should work just like any other commodity. Namely, it should be traded on the open market at its face value. The idea is that workers should be paid what they’re worth, rather than what a state or federal government decrees. Now, that logic isn’t completely unsound, but there are definite issues with that kind of a system.

If you think inequality is bad now, imagine it under a system in which no minimum wage laws are enforced. It might sound nice and look good on paper, but would anyone really expect people to take jobs that pay $4 per hour? There is still rent to pay, kids to be fed, and tuition to think about. Even as individuals hone their skills to potentially become more valuable in the eyes of employers, those kinds of wages won’t cut it.

Many employers have vast armies of employees who work for minimum wage, or close to it. Businesses like Wal-Mart and McDonald’s are the most famous for coming up during these discussions, but they are far from the only ones. It’s true that many small businesses can’t afford to pay more than minimum wage, and that’s understandable. But when the heirs to the Wal-Mart fortune are splitting billions in revenue while great numbers of their employees suffer, it’s hard to stand behind them.

Source: Thinkstock

Source: Thinkstock

According to Forbes, one in five Americans work in retail and fast-food, both notorious for paying low wages. In generations past, these are the kinds of jobs that would operate as a training grounds of sorts; where individuals with little or no skills, or who were young, could find employment and work their way up. But that’s no longer the case, as we’ve come to realize. The recession and financial crisis have made this very clear, as now the average age of fast-food workers is almost 30 years old.

People are not necessarily ‘choosing’ to take these jobs, as many might insinuate. They are taking these jobs because they are the only ones available. The second that these employees ask for higher wages, they are either fired or threatened with replacement by robots. If you’ve ever tried the self-checkout lanes at Safeway, it’s safe to say it’ll be a while before they can fire everyone as those robots have a hard time differentiating between an empty scale and a paper bag. But that’s another argument altogether.

Employers like to threaten employees with termination, although not outright, in order to keep them from speaking up. Lately, wages have been the biggest issue. Businesses try to keep costs down by keeping wages low, but as it turns out, it may be doing more harm and costing them a lot more money in the long run.

Instead of investing in their employees and fostering a harmonious relationship, many employers are more likely to simply cut workers out completely and replace them. Thus, they must restart the hiring process, and spend time and resources pouring over applicants and paperwork, not to mention training for new workers.

All of this costs money. Money that could probably have been reserved for profits, while a little split off to increase compensation levels for those who were let go, or are currently so dissatisfied with their jobs that they call in sick constantly, display poor work ethic, and could possibly drive away customers. Sure, some of these are firable offenses, but people who like their jobs — and respect their employers — often don’t act out in that way.

Forbes brings up a great point — in that businesses need to stop viewing their employees as a minimizable cost, but rather a strategic asset.

Arif Ali/AFP/Getty Images

Arif Ali/AFP/Getty Images

Many of the popular myths about raising the minimum wage have been busted, including that it would cost the economy jobs. According to the United States Department of Labor, raising the federal minimum wage would have no real ripple across employment numbers. “A review of 64 studies on minimum wage increases found no discernible effect on employment. Additionally, more than 600 economists, seven of them Nobel Prize winners in economics, have signed onto a letter in support of raising the minimum wage to $10.10 by 2016.”

The fact is, businesses need to start recognizing that its staff members are an asset — possibly the most important asset it has. By replacing them early and often, it’s only costing itself money. Onboarding new employees — and letting others go simply to reduce wage costs —  is starting to be exposed as a poor strategy.

Take a look at companies like Ikea or Costco; both pay its employees above the minimum wage, and not only does it benefit from having them stick around, but it also have a higher standing in public opinion than many of its competitors. In Ikea’s case, the choice to raise wages is fairly recent. But the decision was applauded by labor groups and others as a positive step.

Naturally, small business and restaurants, both of which operate on slim margins, will continue to fight against wage increases. But the inevitable will happen eventually, and wages are going to increase. Of course, Seattle has instituted a $15 minimum wage to be phased in over several years, and that will really be the experiment everyone will keep their eyes on. Businesses will definitely need to restructure to counteract the change, and it will be interesting to see which employees are let go, and which respond positively to the wage boost.

The wage fight is a long way from being over, but as inequality gaps widen and people grow more and more desperate to simply make ends meet, something has to break eventually. Watch for the companies that invest in its employees to be able to weather the storm in a much more succinct and composed way than those that opt to do the bare minimum for its staff.

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