Minimum Wage Increases: The Key Factor You’re not Looking At

Like a dress code in a public school, minimum wage mandates are invading cities, to mixed reactions. Concern is understandable: As a small business owner, one moment you’re able to outfit your work force into jeans of many brands—from Jordache to Joe’s. Then your city mandates that your employees can only wear only jeans sold at Nordstrom, when you’ve been outfitting much of them in jeans from Wal-Mart. As compensation is likely one of the largest line items in your budget, significantly upping the price of your lowest paid employees is a daunting task that many do not feel they can afford. Much like businesses, cities differ greatly in their ability to handle a significant increase in minimum wage.

Turns out, minimum wage hikes are not ‘one size fits all’. Although we’ve seen discussion of unintended consequences, Seattle and San Francisco seem to be pulling off their new $15 an hour threads, but LA may have some trouble squeezing in. According to a recent New York Times article, the ability for a city to withstand an increase in minimum wage depends heavily upon the ratio of minimum wage workers to medium wage workers. That is, the percentage of the median wage that the minimum wage represents or how much of the minimum wage is captured in the median wage. Economists have data that proves cities won’t pop buttons off their pants if the minimum wage is 50% or a little more of the median wage, but when the ratio increases to 60% or more, economists enter unknown territory and fear it will greatly impact the number of jobs lost.

Economists predict the ratios of Seattle and San Francisco in 2020 to be .54 and .47 respectively. Meaning, the minimum wage would be below 55% of the median wage in both cities. LA is a different story. As of today, LA’s median wage is roughly $18.35. If the approved increase were to go into effect today, LA’s ratio would be a whopping .81! As we’ve seen in our model cities and will see in LA’s recent approval, a sudden increase in every sector in businesses of all sizes is incredibly unlikely as cities have implemented a roll-out feature of incremental increases over a series of years.

Despite the ratio, companies cannot choose whether or not to accept a higher minimum wage. If the city suddenly decides that everyone is required to wear designer jeans, you have to comply even if you currently can afford only off-brand jeans.

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If you’re in a city that is likely to roll out a higher minimum wage, especially if you are in a city where it is yet to be seen if your median-wage to minimum wage ratio will support it, it is important to prepare. One of the biggest fears of a minimum wage hike, aside from being able to shell out the cash, is the fear of losing employees just above the minimum wage threshold or having to pay them more as well—known as compression, one of the four c’s of compensation. It is important to be acutely aware of compression during a minimum wage hike and assess whether or not it is necessary to raise the wages of mid to high level employees along with raising the lowest paid employees.

Though it will not be mandated by law, think of the impact on employee engagement if you purchase the latest trends for one set of employees while another set is left wearing last year’s fashions. Look at the median to minimum wage ratio within your own company. Is it high? You’re likely going to need to shift wages to play fair.

Is all of this talk about minimum wage leaving you feeling a bit overwhelmed? PayScale’s comp pro has the answer. Watch Ask a Comp Pro: Minimum Wage Woes!


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