Connections for Success

 

02.16.15

Wage Increases: Look Before You Leap
Brandon W. Vahl

A recent Gallup poll shows that roughly three-quarters of Americans support a minimum wage increase. Factories and warehouses tend to employ a large number of entry-level and low-wage workers. If you are considering a wage increase for your hourly workers, there are some important questions to factor into your decision.

How Do Your Wages Compare?

Many cities and states already have minimum wage rates that exceed the federal rate, which has been set at $7.25 since 2009. Others are currently considering legislation to increase their rates. Depending on where you are located, you may already be required to pay above-average wages so it may not make sense to increase wages at this time.

Also consider whether a wage increase might make you less competitive globally. Right now, productivity-adjusted labor costs in other developed countries (including the U.K., Germany and Japan) are 20% to 45% higher than U.S. labor costs on average, according to a recent study by the Boston Consulting Group. That gives U.S. manufacturers an edge over other developed nations.

The Chinese government’s 2011-2015 “five-year plan” has increased the minimum wage by an average of 13% per year, according to a website run by the Chinese government. As a result, China’s cost advantage over the United States has been cut in half over the last decade. Accordingly, outsourcing to China is becoming less cost-effective, causing many companies to rethink their supply chain partners.

These example can help you think about what might happen if you increase your wages. It could ultimately make you less cost-effective than global competitors, thereby lowering your sales.  Always perform an analysis and check competitors (at least national or global averages before you take the leap).

What is the Total Cost?

When annualized, the federal minimum wage rate equates to $14,500 for a full-time employee, assuming 50 weeks worked per year. Every $1 per hour more you offer full-timers translates into another $2,000 in wages over the next year. This does not include hidden costs, such as higher payroll taxes, retirement plan contributions or other perks that accompany a wage increase.

An increase in the wages paid to entry-level workers is also likely to trickle up the ranks to more experienced hourly workers and managers. It is questionable whether you can pass along these incremental costs to customers without lowering your sales demand.

Do the Benefits Outweigh the Costs?

A wage increase can also be a great way to show support for and incentivize your workers by enhancing their buying power and sense of self-worth. But budgeting for a wage increase goes beyond simply increasing direct labor costs for your lowest-paid workers.

For questions, contact Brandon Vahl at [email protected] or call him at 312.670.7444. Visit orba.com to learn more about our Manufacturing and Distribution Group.

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