The Impact of Paying Above Minimum Wage on Businesses

Considering the decision of a firm to pay its workers above the minimum wage can be complex, with both financial and practical implications. This article delves into the consequences of such a decision, focusing on the perspective of a small business owner and analyzing the various factors that come into play.

Factors Influencing the Decision

When a business pays its employees above the minimum wage, the decision is not always straightforward. Several factors can influence this choice:

Competitive Landscape: If others in the same industry and area pay above the minimum wage, the business may experience no significant impact. However, if competitors pay the minimum wage, overpaying can attract better-performing employees and improve overall business efficiency.

Lack of Hiring Criteria: In the absence of effective hiring criteria, overpaying may not necessarily bring in better talent. Additionally, it could lead to dissatisfaction among high-performing employees who see that lower-performing ones are being compensated equally.

Customer Perception: Even if employees receive higher wages, the impact on the customer base may depend on whether they perceive any difference in product quality. If they do not see a noticeable improvement, the price increase may not be justified.

Corporate Strategy: Some businesses may overpay to avoid unions, a strategy that was prevalent in the past but less so now. Kodak, for example, was known for this approach, but it contributed to their decline.

Company Ownership: In public companies, shareholders prioritize returns on investment. Overpaying can be justified if it improves employee satisfaction and, consequently, business performance, but if it does not, it may lead to managerial changes.

Real-Life Experiences of a Small Business Owner

From a small business owner's perspective, understanding the true cost of paying above minimum wage can be crucial. Let's examine a case where the minimum wage in the business's state required payment of $14.00 per hour.

Example: A Small Business in a State with $14 Minimum Wage

The Federal Minimum Wage is set at $7.25 per hour, but in the state in question, the minimum wage is $14.00. This amounts to $560.00 per week for a full-time employee working 40 hours.

Employee Payroll Details

The payroll details for an employee would appear as follows:

Hours worked: 40

Hourly pay rate: $14.00

Gross Pay: $560.00

Total Taxes: $152.04 (Federal, State, and Social Security and Medicare taxes)

Net Pay: $407.96

In addition to the taxes deducted from the employee's pay:

Employer Taxes: $48.44 (matching the employee's Social Security and Medicare taxes)

Payroll Fees: $23.60 (for payroll services)

Unemployment Insurance: $19.29

The total cost for the business per employee per week is $651.33, which does not include other business expenses like rent, utilities, and insurance. These additional costs can significantly impact the profitability of the business, especially during lower-demand periods.

Consequences of Mandating Higher Minimum Wages

If a business is required to pay a significantly higher minimum wage, as in the case of $15 or $20 per hour, it can lead to severe consequences:

Business Closure: If the increased costs are unsustainable, the business may have to shut down, as seen in the example where a store had to close down due to inability to generate sufficient revenue.

Job Losses: Employees who are laid off, like the 14 workers in the example, may struggle to find new employment, leading to financial hardship.

Economic Impact: While some employees may benefit from higher wages, the overall economic impact could be negative, especially if businesses are forced to reduce staff or services to maintain profitability.

In conclusion, determining the consequences of paying above minimum wage requires a comprehensive analysis of various factors, including market conditions, employee performance, customer satisfaction, and business sustainability. A balanced approach that considers these elements can help businesses make informed decisions that benefit both the organization and its employees.