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Impact of the Latest Minimum Wage Increases

The new year brings some significant changes that will impact employers who have entry-level workers, with 22 states raising their minimum wages effective January 1st.

Q1 2024
The impact of raising the minimum wage has been a perennial topic of debate. The new changes come in the midst of what continues to be a historically tight labor market, with heightened competition among employers looking for workers.

However, in the modern era, many manufacturers are less impacted by minimum wage requirements than in the past, since today’s manufacturers tend to rely less on low-skill workers. Even so, for manufacturers, “it has been challenging the last few years not only to find skilled employees, but also to find entry-level workers,” says Kathy Mussio of New Jersey-based consulting firm Atlas Insight. “Some manufacturers have lines idling because they can’t find enough people.”

Many manufacturers had already adjusted before the most recent January 1st minimum wage hikes took effect, according to Mussio. There were labor shortages pre-Covid, but the pandemic made the labor shortage problem even worse for many.

Automating processes can be a partial solution to the labor shortage problem, along with other ways to streamline, cut waste, and find other operational efficiencies. “But manufacturers are not thinking, ‘I’ll automate so I can fire more people.’ They’re focused on how to make more product, increase their efficiency, and minimize downtime,” Mussio says.

Automating processes can be a partial solution to the labor shortage problem, along with other ways to streamline, cut waste, and find other operational efficiencies. While manufacturing in the U.S. has evolved to incorporate more technology and automation in the process, “not all manufacturing is easy or clean,” she points out. “We’ve come a long way, but there are still some manufacturing jobs where the plant floor is loud, hot, and sometimes even dirty.”

For a job-seeker choosing between working in a loud, sometimes hot manufacturing plant for $15 an hour, or working at an air-conditioned warehouse stocking shelves for $15 an hour, the manufacturing job option may well seem less appealing.

Absorbingthe Increase
Labor is very cost-sensitive. If minimum wage increases require employers to pay lower-end workers more per hour, that typically leads to pay increases for those who are above them on the corporate “ladder.” And companies vary widely in their ability to absorb wage increases.

“Not every manufacturer has a high profit margin. If labor costs increase further, squeezing the profit margin for lower margin businesses, the higher wage costs will have to get passed on somewhere,” Mussio points out. The higher labor costs get passed ultimately to customers, increasing the cost of the goods. While some companies do try their best to absorb some of these increased labor costs, at some point, “they have to get passed along.”

Along with raising prices, there are other ways to absorb minimum wage increases — especially long-term — experts say. Those include making processes more efficient, investing more in technology, outsourcing some “non-core” functions, increasing and improving employee training, and adopting part-time or flex staffing.

The higher labor costs get passed ultimately to customers, increasing the cost of the goods. Employers who have workers employed in “remote” locations need to be aware of the difference in minimum wage in a particular state and even locally where the remote employee is working. “For example, you may have an entry-level employee working remotely, and while the employer may be located in a low minimum wage state and city, you typically would be required to pay at least the state and local minimum wage where the entry-level remote employee works,” Mussio explains.

A study released in 2023 by economists at Wharton University and several other institutions shed some new light on the minimum wage debate. One of their conclusions is that raising the minimum wage does not automatically guarantee workers higher income, employment, and welfare in the long run.

The authors suggested a more effective way to improve the long-term situation of low-income workers than large increases in the minimum wage. Combining existing “transfer programs,” such as the earned-income tax credit, or a progressive tax system, with a modest increase in the minimum wage provides even larger welfare gains for those workers, according to the study.

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