Impact of the Minimum Wage Increase on NJ Businesses
November 06, 2018
By Andal Iyengar, CPA
Minimum wage is on the rise in the United States. While the federal government mandates a national minimum wage of $7.25 per hour for 2018, local governments have taken matters into their own hands. The city of Seattle was one of the first to set their minimum wage at $15 per hour earlier this year. California, New York, and Washington, D.C., are following suit and have implemented schedules to reach $15 an hour in the coming years. On January 1, 2018, New Jersey’s minimum wage increased from $8.44 per hour to $8.60. Like many states, New Jersey is debating whether to raise the minimum wage to $15 over the next few years.
Proponents of raising New Jersey’s minimum wage to $15 per hour claim that the wage hike would reduce poverty while boosting the state’s economy by helping more working people have more dollars to spend on essential goods and services. Raising the minimum wage could help families keep up with price inflation, help stimulate consumer spending which will eventually help businesses’ bottom lines with increased sales, and grow the economy. When workers earn higher wages, they rely less on governmental “safety net” programs.
Businesses could potentially benefit from an increase in the minimum wage in the following ways:
- Raising the minimum wage could increase worker productivity. Employee morale and work ethic increase when employees believe they are paid a fair wage. Economists have also linked higher wages to better physical and mental health and reduced “decision fatigue,” leading to higher productivity.
- Raising the minimum wage could reduce turnover. Higher wages may lead to lower employee turnover which can be incredibly expensive, resulting in reduced recruiting and training costs and higher productivity. This is true for every kind of business. Every dollar spent on training new employees could be invested on improving other aspects of one’s business.
- Raising the minimum wage could reduce absenteeism. When workers earn higher wages they are absent from work less, leading to increased productivity.
- Raising the minimum wage could lead to increased purchasing power. Small and middle-market businesses rely on the strength of the local economy to be successful. Increasing the minimum wage puts more money in the pockets of employees which, in turn, is likely to be spent at local businesses. Here’s the reality: Lower-wage workers are not going to stash their paychecks in an off-shore tax haven. They’re going to use any extra money on rent, food, clothing, and other necessities. In short, increasing the minimum wage pumps money back into the local economy in a way that clearly benefits small and middle-market businesses.
- Raising the minimum wage helps to attract new customers. Consumers are increasingly spending money at businesses that support important social causes. At the same time, consumers are also punishing businesses that fail to honor their ideals. Increasing pay for employees and publicizing that decision is a great way to attract new customers to any business.
Moving on to the other side of the coin, an increase in minimum wage to $15 per hour may not be a welcome change for several small businesses due to the incremental costs that businesses need to incur.
Here are some of the arguments against raising the minimum wage. Some believe it could lead to:
- Lay-off of employees. Employers with tight budgets may lay-off employees to remain solvent. Some employees would make more, but others would have to seek other employment – stressing the unemployment system.
- Fewer jobs creation. Many employers might choose to hire fewer employees than they would have done; or they may be forced to simply do without the additional help.
- Increase in cost of items. A higher minimum wage could increase the costs of items that the average American buys as businesses may pass on increases in costs to the buyers. It could bring about an across-the-board rise of inflation as a result too.
- Outsourcing jobs. Businesses may outsource more jobs to countries with lower (or non-existent) minimum wage standards.
- Teens will struggle to find summer jobs. Many teens will find it hard to find as many jobs as before if the minimum wage is raised. These minimum wage jobs are typically the starting points for many teens looking for summer jobs.
Any increase in the minimum wage needs to be carefully implemented. The right balance needs to be found to improve the lives of the state’s lowest paid workers without negatively impacting New Jersey’s business economy in the process. In order to make the wage increase issue acceptable across the board, a comprehensive approach needs to be adopted in lifting the wages of a low-wage earner which goes beyond just an increase in the rate per hour. That could include a gradual phase-in of any minimum wage increase, youth wages for teenagers who otherwise will find it difficult to get that first job at such an advanced rate and exemptions for farm workers and employees of seasonal tourism businesses.