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Wage Increases: Look before You Leap

April 4, 2016
DMoeder - 1

Author: Dawn Moeder, Partner of Assurance Services

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. So you may be considering a wage increase for your hourly workers. Here 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. Cities and local municipalities have been leading the charge, but California is poised to set a state-wide minimum wage of $15 by 2022 across all business sectors, and other cities and states are following in hot pursuit. Depending on where you’re located, you may already be required to pay above-average wages—or soon will be—so it may not make sense to increase wages at this time.

Also consider that 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 percent to 45 percent 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 percent 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. So, outsourcing to China is becoming less cost-effective, causing many companies to rethink their supply chain partners.

Let China serve as an example of what might happen if you increase your wages. It could ultimately make you less cost-effective than global competitors, thereby lowering your sales.

What’s the total cost?

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

Moreover, 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’s 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 be a great way to show support for 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. Contact an accounting professional at LGT to guide you through this tough decision.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

 

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