Minimum wage definition

Minimum wage is the lowest salary an employer can legally pay to their nonexempt employees, either according to law or per a labor union contract if one exists for the company.

The Fair Labor Standards Act of 2009 raised the federal minimum wage to $7.25 per hour, but since that time, the cost of living and inflation have outpaced that minimum. The dollar had an average inflation rate of 2.18% per year between 2009 and 2021, producing a cumulative price increase of 29.56%. This has led many to infer that another minimum wage raise was well overdue.

The proposed Raise the Wage Act of 2021 says that all states must raise their minimum wage to the new minimum of $15 per hour by 2025. The bill outlines the recommended annual rises to achieve that 2025 goal. However, each state has the ability to set its minimum wage above the federal amount. Some states and territories have already been raising their wages as per voter mandates and may reach the new minimum before 2025.

The U.S. Department of Labor has information about your state’s minimum wage and any other applicable laws as they pertain to employing staff, including how minimum wage works for employees who receive tips and earn a subminimum wage.

Raising the minimum wage: the pros and cons

As with most things having to do with business, there are broad-based economic pros and cons to a minimum wage increase. The pros of this change include:

• Boosting the economy: A great way to boost the economy is to give people the funds they need to purchase products, goods and services. Increasing the minimum wage gives individuals more buying power, and the economy can experience an uptick because of increased spending.
• More jobs: As people continue to stimulate the economy with their new purchasing power, demand increases, which can lead to the creation of more jobs to keep up with demand. Companies then need to hire more workers so they can keep up.
• Helping employees and their families: Other than being able to purchase more items, employees and their families benefit from a minimum wage increase because it helps them weather price inflation and the inevitable increase in the cost of living. Raising the minimum wage pulls a lot of families out of poverty.

In contrast, there are also cons of a minimum wage change, including:

• Higher product costs: An increase in the minimum wage adds to the overhead costs of operating your business, which may result in a higher price point getting passed along to consumers. Over time, this may translate to a higher cost of living and more minimum wage increases.
• A stalled job market: Because of the increased cost of doing business, companies may go on a hiring freeze to keep costs as low as possible. This means that unemployed people or people who have just graduated from college may end up spending more time and effort looking for a job before getting hired.
• More outsourcing: If the cost of outsourcing work is less than the cost of hiring new employees, companies may gravitate toward outsourcing to keep overhead costs at a manageable amount for successful operations.

Benefits of raising the minimum wage

On top of the pros listed above, there are additional, more business-specific benefits from raising the minimum wage in your workplace, including:

• Job satisfaction: When they receive higher pay, employees may feel more satisfaction in their jobs. Job satisfaction equates to higher levels of collaboration, creativity and communication among all employees.
• Employee loyalty: Employees satisfied with their pay are more likely to be loyal to their current employer rather than looking for work elsewhere. This helps the business because, with less employee turnover, costs for hiring and training new staff are reduced.
• Motivation: Getting paid more motivates employees. They want to work hard to make sure they meet expectations and keep their jobs.
• Performance: If employees are getting paid more than before, you may notice better performance from your staff, especially if they were once working two jobs to afford to pay their bills. Employees may stop working at their side jobs, meaning they’ll be better prepared and focused when coming to work at your business.

Tips to determine if you should increase your base pay

There may come a time during the course of doing business when you consider increasing the base pay for employees. Here is how you can determine if that’s the right move:

• Consider the cost of living: As the cost of living fluctuates, employees turn to their place of employment and expect more money to offset a shift in the economy. If you’re able to accommodate that shift by providing an increased base pay, you may notice more candidates for your open positions and a stronger work ethic in the workplace.
• Think about your current talent: If your workforce could use a refresh, increasing your base rate can motivate current staff to put in additional efforts and make your company appealing to job seekers who will make great employees.
• Look into the market rates: Market rates determine how much your current and potential employees expect you to pay them. If you cannot afford enough of an increase to match the market rate for the same positions, improve the benefits package. One possible improvement is to offer more vacation time.

It’s helpful to get ahead of any federal minimum wage increases so your business becomes accustomed to operating with these costs instead of having to make quick adjustments whenever Congress passes a new wage law.

How to prepare for a minimum wage increase

Many believe that a minimum wage increase is inevitable, so it’s important to prepare now to put your business in a position to take on this rise in operating costs. Here are some ways to set your business up for success from a minimum wage or base pay increase at your company.

1. Watch the clock

Many companies pay time-and-a-half for overtime, which can add up quickly. Let employees know that you won’t allow overtime unless it’s been approved ahead of time for an important project. This will decrease your labor wages. Another way to spend less on pay is to prevent employees from clocking into work ahead of their scheduled time.

2. Be strategic with pricing

An increase in overhead costs could inevitably lead to an increase in the pricing of your items. Instead of increasing the price of everything you produce, be more strategic with your new pricing model. Base new pricing on what similar products are selling for in the market, and differentiate your product as a superior one that’s worth the extra cost.

Read more: How to Determine Pricing for Your Business

3. Budget for the expense

Part of preparing includes budgeting for this expense. Calculate the effects of the increase both financially and otherwise, for example, in layoffs or workforce restructuring considerations.

Look at what you are paying others in your organization. With a federal minimum wage increase, your lowest-paid employees might experience a pay increase that puts them right at or only slightly under the staff members who have been through promotions and raises or have put in more time at the company. In other words, a minimum wage increase may also put you in a position of needing to provide raises to other employees out of fairness to them.

Prepare accordingly for a change of this nature, and you likely won’t have to pivot at the last minute when the new minimum wage rolls out. Plus, your employees will appreciate your forthrightness and concern about the status of their pay to implement a plan as a preparatory measure.

Frequently asked questions about raising the minimum wage

Which state has the highest minimum wage?

Though the District of Columbia already has a minimum wage of $15, it’s not a state. California is the state with the highest minimum wage at $14 per hour.

What are the effects of a $15 minimum wage?

According to the Congressional Budget Office, a minimum wage of $15 per hour raises wages for 17 million workers and reduces unemployment by about 1%. They also state that it would help small businesses by increasing consumer spending and by improving worker productivity and customer satisfaction.

Is there a difference between minimum wage and living wage?

Yes. The minimum wage is the minimum employers must pay workers. The living wage is the money workers need to earn to cover the basic costs of living in a given area, such as food and shelter. In many cases, the minimum wage may not be enough to be considered a living wage.