The US minimum wage debate: mission impossible or mission critical?
The US minimum wage debate: mission impossible or mission critical?
America has an income inequality problem, and it’s not new. Recent political and social events have brought the problem to the forefront in recent years, and it was sharply exacerbated in 2020 due to the Covid-19 pandemic.
One of President Biden’s recently announced initiatives is to seek to raise the federal minimum wage from $7.25 to $15 per hour. Many corporate lobbyists argue that such a move will either force companies to pass the added costs onto consumers, or trigger cost-cutting measures that can hurt businesses in human-resource-sensitive industries such as services, retail, restaurants and manufacturing.
Figure 1: The 15 lowest-paying occupations and number of people employed within
While it’s true that achieving a living wage for all working Americans is not an easy initiative, and there are costs associated with paying such a level of wages, many economists agree that job quality is one of the top drivers for labour market participation and GDP growth. They argue that giving people a decent living wage could outweigh the costs from a macroeconomic perspective, and potentially even force companies to innovate and achieve new efficiencies.
The $64,000 question: is $15 per hour the right level?
In 2019, 46.5 million Americans working in occupations where the median wage was less than $15 per hour.
To put this into perspective, let’s assume a worker (with family) makes the median wage of $15 per hour. If they work a full-time schedule of 40 hours a week for 52 weeks a year (no holiday, sick-days or vacation time), that would generate annual earnings of $31,200 a year, before taxes. Utilitising the data put together Zippia and the MIT Living Wage Calculator you can see that $31,200 is below the living wage in every state in the union.
Figure 2: A $15/hour wage is not sufficient to provide a living wage anywhere in the US
Source: MIT, Zippia, as of March 2020. The living wage shown is the wages that an individual in a household must earn to support his or herself and their family. For more information, visit www.livingwage.mit.edu
So should the debate focus more on job quality than just wages?
A good job is not just about higher wages, although this is a meaningful part of the equation. It is also about providing other basic needs including access to health care, retirement plans, training, steady hours, and equal opportunity for promotion.
Here too, many companies will argue that the added costs of such benefits would be a significant detriment to their bottom lines. We would argue that people employed in poor-quality jobs are likely to be presenting costs to businesses – with many employers not being aware of this.
The estimated costs of disengaged employees are significant: 37% higher absenteeism, 18% lower productivity and 15% lower profitability – all of which amount to an estimated overall cost of 34% of a disengaged employee’s salary. in other words, a disengaged employee can potentially cost $3,400 for every $10,000 earned.
Would a higher wage solve this?
Much discussion focuses on the “risk” perspective and how higher human-resource costs can impact an organisation.
However, there are significant value creation opportunities by investing in employees. Studies show that reducing employee turnover by 50% can increase productivity by 20%. Higher-paid staff help create a culture of hard work, which often results in greater customer service and loyalty.
Higher employee engagement has been shown to be correlated with strong sales (+20%) and profitability (21%). Even more importantly, higher staff engagement results in around 70% fewer safety incidents and a 41% drop in absenteeism.
Professor Zeynep Ton is the founder of The Good Jobs Institute and has written extensively on this topic. She argues that offering living wages and investing in staff over the long term, can lead to operational superiority and higher sales and profits. If effectively implemented, she claims, a “Good Jobs” framework dispels the myth that higher wages always lead to lower returns.
More quality jobs are also essential for a more equitable economy. Closing the job quality gap is also key to a stronger long-term US economy as the purchasing power of those most adversely impacted by a lack of quality jobs will continue to rise.
Time to move the debate
We would suggest the debate needs to become a question of whether industries are prepared to look deep within their balance sheets and business models to find ways of offering employees minimum levels of hourly wages, benefits and regular shift frequency. We would challenge companies to look beyond the short term. They need to be willing to sacrifice the short-term pain (for example, higher wages) for the potential long-term gain in the form of increased productivity, market share and earnings.
The social benefits are obvious. The political structure, too, seems to be in place for this to become reality. From the investment angle, the stakeholder discussion has become much more transparent and there’s now greater pressure on businesses – both private and public – to do right by their employees.
In our opinion, those companies unwilling to innovate toward considerations such as a $15-hour wage will face pressure from consumers and competitors who are finding ways to accomplish such things… and who will remain profitable, and ultimately benefit. As investors, we are keen on engaging with both sides of the wage debate. But as with all disruptive forces, only the strong will survive.
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