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Rising Labor Costs Put Pressure on Small Businesses

June 27, 2022  - Industry News
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Many employers have responded to the Great Resignation by increasing their wages ahead of a federal mandate. However, if you’re a small business owner, you may be fearful of how a minimum wage increase will impact your business. There are pros and cons when increasing wages. Here are some things to consider before making a change.

Pros of Minimum Wage Increases for Small Businesses

More Productive Employees

One advantage of increasing the minimum wage is a possible boost in employee productivity. Higher wages could result in workers putting more effort into their job duties and producing higher quality results.

The Harvard Business Review analyzed wage hikes at Amazon and found employees were more invested in retaining their job. Their efforts were less likely to wane and more likely to increase due to higher pay. A paper by economists Laura Bucilia and Curtis Simon concludes that higher wages also reduce employee absenteeism, which results in higher productivity.

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Reduced Turnover

Small businesses can experience savings from reduced employee turnover. A study published at the Institute for Research on Labor and Employment concluded that an increase in the minimum wage can reduce turnover costs, which includes saving on hiring and training costs.

Rise in Profits

One of the main arguments for raising the minimum wage often contradicts the fears of most business owners, which is a decline in profits. However, the case is made that those who earn higher wages pour it right back into their local economy. When workers have more money, they tend to spend it at their local businesses. These businesses then experience an increase in profits.

Cons of Minimum Wage Increases for Small Businesses

Now that we've looked at the positive side of things, let's take a look at how an increase in minimum wage could potentially harm small businesses.

Employee Layoffs

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A rise in minimum wage may dramatically increase operating costs. If small businesses can't afford this increase, especially if profit margins are already slim, they may have to cut jobs to maintain profits.

When job reductions occur, this also affects a small business's ability to maintain its current standards of operation. Fewer workers can mean a loss of productivity and an inability to efficiently serve their existing customers.

Slim Profits

Many businesses could experience a stark decrease in profits due to putting more money towards labor costs. For businesses with already slim profit margins, a rise in minimum wage can be detrimental because they simply cannot afford to pay their workers more.

Price Hikes

Inflation in 2022 has hit 8.5%, the highest rate since 1981. Consumers are well aware of this surge, but it makes it hard on small businesses that need to increase prices to even out increased labor costs. As a result, they may lose loyal customers who are searching for lower prices.

5 Ways to Handle a Minimum Wage Increase

If you’re worried about what a minimum wage spike could mean for your small or mid-sized business, here are some suggestions to help you navigate the situation:

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1. Raise your prices with transparency: If you need to increase your prices to profit, be forthcoming with your customers about your reasons. Customers appreciate honesty and often stay loyal to businesses they love.

2. Increase profits with referrals: Tap the power of word-of-mouth. Your customers love your products and services, so start a referral program to bring in more revenue.

3. Cross-train your workers: You can keep labor costs down by cross-training your workers in more than one area so they can meet a variety of tasks.

4. Assess your operations: Are there any processes that can be improved upon? Examine your current state of operations, ask for employee feedback, and brainstorm improvements that will save time and money.

5. Apply for financing: Applying for a small business loan has several benefits. You can take advantage of bulk discounts with a loan, thereby saving money, or upgrade your equipment or software to improve efficiency. You can also use it to invest in marketing for your business.

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