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Post-Election, Prepare for More Minimum Wage Hikes

Five states—Arizona, Colorado, Maine, Washington and South Dakota—voted on minimum wage referendums during the national election, with voters in all cases either supporting a wage increase or rejecting a decrease.

Economists predict more of the same in the future, as voters in neighboring states push legislators to formulate similar referenda.

“If your state is paying a $7.25 minimum wage and your neighbor is paying $12 an hour, you’re going to insist on parity,” said Dean Baker, co-director of the Center for Economic and Policy Research, a nonpartisan research center. “This is a populist agenda that is not going to stop until there are negative effects.”

“More states will follow suit (and raise wage rates),” said Mark Fratrik, senior vice president and chief economist at research consultancy BIA/Kelsey. “Voters will want comparative wages, which will have a significant effect on businesses in these regions, affecting their growth, profitability and, by extension, their hiring practices.”

On November 8, South Dakota voters rejected a decrease in the minimum wage for those under 18. The remaining four states voting on the matter came out in favor of gradually increasing the minimum wage over the next few years. Voters in Arizona, Colorado and Washington chose to increase the minimum wage to at least $12 an hour by 2020, while Washington approved a raise to $13.50 an hour by 2020.

“I wouldn’t rule out that he may raise it, but he could also heed the advice of Republicans in Congress who say `Don’t go there.’ Assuming this is the case, the matter will continue to be addressed on a state-by-state basis.

President-elect Trump has seesawed on the subject of increasing the federal minimum wage, currently $7.25 an hour. “On one occasion, he said it should be lowered; on another he said it should be raised,” says Baker. “I wouldn’t rule out that he may raise it, but he could also heed the advice of Republicans in Congress who say `Don’t go there.’ Assuming this is the case, the matter will continue to be addressed on a state-by-state basis.”

CEO feedback
CEOs of companies in the states and cities that are raising the minimum wage obviously confront the specter of higher labor costs. The issue is how this will affect these organizations’ margins and what their chief executives can do about it. Some economists like David Cooper take the high road. “CEOs should view the wage increases as an investment in their workforce—even if it’s a mandated one—and an opportunity to look for new productivity and quality enhancements,” says Cooper, senior economic analyst at the Economic Policy Institute, a Washington DC think tank with a focus on labor issues.

While Cooper acknowledges that labor costs are likely to go up, he cites internal research indicating that minimum wage increases produce ancillary benefits, such as a reduction in turnover. “Businesses won’t have to spend as much on recruiting, hiring and training new workers,” he says. “And with longer worker tenure, there’s greater opportunity to refine workers’ skills.”

Baker has a different perspective. “This is less of an issue for CEOs of companies in metropolitan areas in and around Seattle, where the economy is booming thanks to Amazon, Microsoft and Boeing,” he says. “Employers should have no trouble paying $13.50 an hour come 2020. But when you get to the eastern parts of the state where the economy is much less robust, that’s a pretty significant increase in wages for businesses. It could backfire and result in job losses.”

Fratrik projects the higher wages will compel companies to raise the price of their products and services and seek ways to lower business expenses. “Many of the jobs in the minimum wage category could be replaced by robotics,” he explains. “There are a lot of fast food restaurants that have gone on the record about their plans to take humans out of the equation, asking customers to order and pay for food online or at in-store kiosks. The higher wages go, the greater the reasons to do this, given the supposed productivity enhancements.”

CEOs in all states should prepare for higher minimum wages, but not rush into making hasty decisions. Since these are statewide policy changes, competitors will face the same labor cost challenges. Consequently, no individual business will be at a competitive disadvantage if they have to adjust pricing. But it also means that companies have an opportunity to best the competition by improving quality and efficiency.

“If everyone’s prices are going up, but you have the best product quality or the best customer service, you’re going to be ahead of the pack,” says Cooper. “And if you can come up with smarter, more efficient ways of operating, maybe you won’t have to raise prices as much as your competitors.”

The bottom line: Treat the increase in labor costs as a necessary investment. And then determine how to maximize the return from that investment.

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About Russ Banham

Russ Banham
Russ Banham (russ@russbanham.com) is a contributing writer to Chief Executive