…So Seattle just raised its minimum wage from $9.32 to $15.00. The change will take place over several years (as early as 2017 for some businesses and as late as 2021 for others), with the speed at which employers have to comply varying by business size and benefits mix.
The arguments for and against raising the minimum wage are well documented. Some of the pros are increased purchasing power for a subset of the population more likely to spend the additional money (as opposed to investing it), which will spur economic growth. There are also equality/social justice arguments for raising the minimum wage. Conversely, according to a recent report from the Congressional Budget Office, raising the federal minimum wage from 7.25 to even $10.10 an hour (a comparatively paltry 39%) would cost the economy aproximately 500,000 jobs (reducing employment by 0.3% nationally).
There are are several demographic factors that make comparing Seattle’s situation to that of the nation’s as a whole difficult, but it’s probable the 61% spike will result in an uptick in unemployment. There is also a danger that businesses will pass much of this cost onto consumers (erasing some of the raise), and also cause employers to cut employee benefits in response (further eroding the wages growth). With all that said, we don’t really know what will happen yet, and this will be an interesting case study.
…I’m not writing about this story today from an Economist’s perspective, though (I lack both the training and subject matter expertise to go much further than I did above). But as an HR guy that also happens to be a comp wonk this story horrified me: Not in the sense that I was alarmed workers making a minimum wage were getting an increase. If the minimum wage had kept up with inflation it would be around $10.52 an hour (peaking as high as $21.72 if one assumes worker productivity gains are evenly distributed). So in many ways this is perhaps long overdue.
No… I am horrified at the havoc raising bottom earner’s wages 61% over a 3-6 year period will have on organization’s comp structures. I mean, if we assume that the next highest paying job in a company currently paying its employees $9.32 an hour is even 50% higher and that the job is overtime eligible, a 61% increase to the minimum wage still causes all sorts of compression issues (a worker earning 50% more than the minimum wage currently makes just under $14). To be sure, those same employees will be getting 3%ish raises over that time if we look at historical data… or perhaps employers will dole out some lump sums to compensate for the added headcount costs at the bottom of the job hierarchy.
In the case of the latter, if employees are inequity intolerant it can adversely impact performance in a significant way. When employees in bigger jobs see their colleagues getting raises that erase their pay differential (despite the higher paid workers having greater seniority and/or skills) they are going to demand higher wages as well. And lest retention become an issue, many employers will be obliged to give in to such a request (which will lead to a domino effect until the gap between earnings at the next step is large enough that no compression issues are created by the new increases at the lower step).
…Setting aside the added human capital cost to employers, this is going to potentially be a nightmare for many a business (and HR department) to manage from an engagement/retention/administrative standpoint – pick your poison depending on the action taken to address the compression issues here.
I mean… am I off on this one? Social good aside, this is going to wreak havoc on some Seattle businesses, right?
As always, please share your thoughts in the comments section below.