A Rising Federal Minimum Wage: The Facts and Its Impact
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowAfter more than a dozen years since the last increase to the Federal minimum wage, pressure has grown for a significant increase, with $15 per hour being the proposed phased-in target – more than double the current $7.25 per hour rate. With such a large eventual increase looming, what are the potential points of impact for society and the economy? Let’s take a look.
Minimum Wage: The Status Quo
The current Federal minimum wage of $7.25 per hour was established in 2009. And despite competitive pressures and recent low unemployment (before the COVID-19 pandemic and as normalcy returns), two of every 100 U.S. workers still earn minimum wage. While this number might seem to be a small percentage, earning minimum wage puts workers well below the recognized poverty level. In fact, even if workers eventually earn a mandated $15 per hour, anyone earning less will still be at poverty level. That’s why so many experts feel the increase is long overdue.
Minimum Wage vs Living Wage
To appreciate the importance of an increased minimum wage, it’s important to understand another benchmark: living wage. “Living wage” is defined as a wage level high enough to maintain a normal standard of living, one that enables the worker to meet basic needs, including food, housing, transportation, clothing, etc. In central Indiana for example, the living wage for one adult with no children is $14.62 per hour in Marion County. In Elkhart County to the north, the single hourly living wage is $13.04; while Harrison County in southern Indiana has a living wage of $13.61 per hour. Obviously, these living wage rates are far higher than the current $7.25 minimum wage.
Federal Minimum Wage vs State Minimum Wages vs Marketplace Standards
While the Federal minimum wage has fallen behind economic realities, states have generally stepped up and filled some of the gap with their own minimum wage standards. In 2021, at least 20 states are likely to enact minimum wage increases. These increases range from 8 cents per hour to $1.50 per hour. Some state minimum wage levels remain below $9.00 per hour while other states have hourly minimum wage levels five dollars higher.
Industries and major employers may also have their own standards, provided they meet both state and Federal wage requirements. Market forces often motivate employers to implement pragmatic standards in order to remain competitive. This is especially important in a tight labor market. Bank of America, Amazon, Costco, and Target, for example, are already at the $15.00/hour starting wage level. Starbucks, Walmart, and Kroger have committed to getting there or higher within a couple of years.
Meanwhile, the proposed Indiana regulation would phase in the top level, beginning with an initial boost to $10.00 per hour, then $13.00 in 2022 and finally to $15.00 in 2023. As of this writing, however, the legislation has not passed and faces strong partisan opposition.
Potential Impact of Increasing the Minimum Wage
Regardless of how wage standards rise – by Federal or state mandate or by market forces – increased wages invariably impact the economic landscape.
For starters, it’s important for businesses to understand and prepare for pay compression. This occurs when starting wage levels rise significantly but the wages of longer-tenured employees rise more slowly. Thus, pay ranges compress, bringing entry-level workers closer to the top and more experienced workers closer to the bottom. Nonetheless, competitive pay ranges are critical for employers to attract, motivate, reward, and retain employees.
Increased minimum wages would likely positively impact society by lifting women and people of color to a fair living wage. It is estimated that 900,000 workers would be lifted out of poverty. On the other hand, prices will likely increase as well, eroding spending power. Businesses may cut staff or reduce hours. In fact, the Congressional Budget Office (CBO) projects the loss of 1.4 million jobs by 2025 – a number that equates to less than 1% of current total jobs.
Other changes may also accelerate with rising minimum wages. The number of “gig workers,” already trending up, will likely continue to rise. Incentive pay may become more important. Pay transparency will be critical. And employers will be forced to proactively promote diversity, equity, and inclusion.
Regardless of the forces in play, wage levels are rising. To remain competitive, businesses need to stay informed and ahead of the curve. Employers would be wise to conduct pay equity analyses and market benchmarks annually.
Cassandra Faurote is the CEO of Total Reward Solutions, a compensation consulting firm and author of Compensation Sense 101: Common Sense Answers to Your Questions About Employee Compensation and Total Rewards. Reach her at cassandra@totalrsolutions.com.