In a nutshell: Talk of living wages isn’t going away. Here’s what you need to know, how wage increases could affect your business (negatively and positively) and steps you can take to prepare.

There’s an important discussion going on right now in the United States about living wages, and your organization needs to be aware of the issues — and perhaps even planning for imminent change. Many business leaders, especially small business owners, are fearful of living wages, as they will certainly lead to higher employment costs. However, there are some important, business-friendly arguments to be made in favor of living wages.

Here’s an overview of what you need to know.

What Is a Living Wage?

When a worker has a living wage, it means they are earning enough money to cover standard living expenses in their area. This doesn’t just mean living above the poverty level; nor does it mean an extravagant style of living. The living wage model employed by the Massachusetts Institute of Technology (MIT) is described this way:

“The living wage model is a ‘step up’ from poverty as measured by the poverty thresholds but it is a small ‘step up,’ one that accounts for only the basic needs of a family. The living wage model does not allow for what many consider the basic necessities enjoyed by many Americans. It does not budget funds for pre-prepared meals or those eaten in restaurants. It does not include money for entertainment nor does it does not allocate leisure time for unpaid vacations or holidays. Lastly, it does not provide a financial means for planning for the future through savings and investment or for the purchase of capital assets (e.g. provisions for retirement or home purchases).”

MIT’s Living Wage Calculator estimates what a living wage would be in each state. Obviously, this varies widely by location. In famously expensive San Francisco County, CA, the living wage for one adult living alone is about $20 an hour. In rural Butler County, AL, the living wage is approximately half that.

In Some Places, Increased Wages Are the Law

Depending on where your business is located, the matter might be entirely out of your hands. A growing number of states and municipalities are passing legislation to increase minimum wages. Typically, these increases are phased in over several years. According to the University of California, Berkeley, Labor Center, 40 cities and counties have enacted minimum wage ordinances as of mid-2018. In Chicago, for example, the law stipulates a minimum wage of $13 by 2019. In Washington, DC, the minimum wage will be raised to $15 an hour by 2020.

Wage ordinances don’t always pass. The Labor Center says that laws have been overturned in nine cities and counties, including Birmingham, AL; Miami Beach, FL; and Kansas City, MO.

The Warnings are Dire

Some activists are energized in their fight for living wages. Fight for $15, which describes itself as a “global movement in over 300 cities on six continents,” is advocating for a $15 minimum wage.

The response from the business community is strong, even though it’s less visible — after all, this is a sensitive issue, and business advocates don’t want to appear heartless. The strategy is often to shift the conversation from living wages to how it would affect employers: Some businesses might have to reduce their workforces; others might simply go out of business because they can’t incur the higher employment costs.

The National Restaurant Association says that minimum wage increases “would ratchet up restaurants’ labor costs and result in thousands of jobs lost.” The Heritage Foundation, a conservative public policy research institute, calls minimum wage increases “a fringe idea” and says that they would lead to significant job losses in every state except New York. Texas would be the hardest-hit, losing close to a million jobs, and Florida would be the second-hardest losing more than half a million.

A Silver Lining

There might be some advantages to wage increases for employees, especially if you implement them before your competitors do. In 2015, the U.S. Department of Commerce’s Economics and Statistics Administration released a report that says higher wages have two significant benefits: higher productivity and lower turnover. It says:

“Taken together, these results imply that higher wages often lead to improvements in skills, motivation and workforce stability, especially when combined with changed strategies in areas such as product design and cross-training. Thus, employers can often adjust to higher wages without significant reductions in employment or profits.”

A recent report by Glassdoor confirms the Department of Commerce report. It found that pay is the No. 1 reason why people quit their jobs– higher than career advancement opportunities and benefits.

Getting Ready

If wage increases are in your future — either because you want them, or because legislation requires them — there are three things you can do to mitigate the impact.

First, take a close look at your operating expenses. You might be able to reduce overhead so that you can absorb higher wages without affecting profit levels.

Second, consider raising prices. This might not be possible in some industries, but you might find you have the ability to charge customers more. This will be easier to accomplish if you fully understand your value proposition — people might be using your products or service because you provide a superior customer experience, not because you have the lowest prices.

Third, reduce the size of your staff if it’s absolutely necessary. Of course, this should be a last resort, but it might be unavoidable. There might be opportunities to outsource non-core functions that you currently perform in-house. You might also be able to invest in automation, using technology to take over roles that are currently done manually.

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