A $15 Minimum Wage Doesn’t Have to Mean Price Increases

6/9/14Follow @nakedcmo

Last week, Seattle approved the nation’s highest minimum wage: $15 an hour, to be phased in over the next seven years. Other major cities, including San Francisco, Chicago, and New York City, are debating similar increases, and President Obama has called for an increase in the federal minimum wage from $7.25 to $10.10 an hour.

A report from the Congressional Budget Office found that boosting the federal minimum wage would provide $5 billion a year more for families living in poverty and $12 billion a year more for families earning from one to three times the poverty threshold.

Opponents of the proposal say it would cost businesses too much, requiring them to raise prices, and ultimately end up reducing total employment by 500,000 workers by the second half of 2016.

But what if there were a way to pay for minimum wage increases without automatically increasing consumer prices?

Now is a good time to look at the hidden costs of recruiting and hiring hourly-wage workers.

First, some background about the hourly jobs market: The 75 million U.S. hourly workers make up about 59 percent of the workforce, forming a key pillar of the economy. The retail and hospitality sectors represent close to one-third of these jobs, and that share is growing. The U.S. Bureau of Labor Statistics forecasts that the retail sector alone is expected to add more than a million jobs in the coming decade, reaching nearly 16 million positions by 2022.

Growing the workforce while significantly increasing wages is a complex challenge for any business, especially when the market served by that business cannot support increased prices. But there are hidden costs that businesses can eliminate with the help of technology to partially offset the cost of wage increases.

Hourly employees are arguably the face of most businesses, and yet they represent the most challenging labor segment in terms of recruitment costs, constant turnover, and unplanned absences. Various research studies estimate that the cost of hiring a new or replacement hourly worker is 30 to50 percent of the worker’s annual wages.

The Aberdeen Group has estimated that average turnover can range from more than 50 percent for line-level hotel and motel employees, to 104 percent for specialty stores, to more than 200 percent annually in fast-food chains. The dual impact of attrition and economic growth means that employers in the United States need to make over 50 million hires every year in the hourly jobs sector.

With such a large number of hires per year, inefficiencies in the recruitment process add up. Businesses devote more than one billion hours a year to processing close to a billion job applications at a cost of more than $30 billion. These inefficiencies also result in unnecessary delays for job seekers.

There are several underlying causes for this. One big one is a disconnect between how employers and job seekers use technology. While 70 percent of the hourly wage workforce prefers to use mobile devices, less than 20% of employers are truly ready for mobile job applications.

Inefficiencies are compounded by manual processes, time-consuming pre-screening phone calls, paper-based job applications from walk-in applicants, and lost productivity. The average store manager in the retail and hospitality sectors spends eight hours conducting pre-screening interviews for each open position, with much of that time wasted on candidates that aren’t the right fit.

This time could be spent selling more, servicing more customers, training the workforce, and growing the business, which, ultimately, results in more jobs.

At Jobaline, we have passion for this beautiful country that we proudly call home, and we have passion for technology. We have proven that our solution helps to partially address these inefficiencies that cost billions to the companies hiring hourly-wage workers.

Improving the process of promoting job openings and attracting qualified candidates could significantly cut down on that billion hours spent annually to recruit and hire hourly workers.

This would certainly generate substantial savings that could be used to pay for wage increases or business growth, leading to more jobs.

Luis Salazar is CEO of Jobaline.com, the fastest growing multilingual and mobile hourly-jobs marketplace expanding to 50 U.S. cities this year. Follow @nakedcmo

By posting a comment, you agree to our terms and conditions.

  • bdcstrong1

    Nice analysis, but you want fries with that burger and I’ll make 15 bucks an hour! The only part of your analysis that is missing regards the fact that ALL wages will increase due to this mandatory increase in the minimum wage…

    • warbunny

      Not true at all. Over the past 30+ years, the minimum wage has risen numerous times, but the middle class typically does not see a similar boost in wages. This is one of the main factors as to why the middle class in ths country isn’t doing so well. Minimum wages increases typically result in four things:
      1. The middle class is squeezed closer to joining the ranks of the lower class. If you raise the minimum wage by nearly 50%, like the Socialsts want, you do not get a corresponding 50% increase in middle class wages. In fact, you probably won’t see much more than a 5% increase, if that.
      2. Many people who rely of more than one form of assistance lose some, if not all of those benefits, since Congress typically does not adjust the poverty line to match the minimum wage increase effects.
      3. It weakens our ability to be competitive globally. Exports become more expensive, so we have to import more.
      4. It causes the cost of living to increase, resulting in few actual gains.

      • Michael B.

        Most of what you say is true, except this part:

        “2. Many people who rely of more than one form of assistance lose some, if not all of those benefits, since Congress typically does not adjust the poverty line to match the minimum wage increase effects.”

        Congress has no part in determining the poverty level, that comes out of the Census data.

  • the_caganer

    let’s see pay an employee $31,200/yr or buy a Baxter for $25,000. Hmmmm. Maybe create an app so we can get rid of cashiers. Hmmmm. For tech blog this is surprising stupid analysis. But straw men are easy to defeat

    https://itunes.apple.com/us/app/panera-bread/id692365393?mt=8

    http://www.rethinkrobotics.com/products/buy-baxter/buy-baxter/

    • wonderingstevie

      You beat me to it. Baxter doesn’t take vacation, get sick, have fights or steal inventory either. They could certainly flip burgers, cook fries and fill drink orders.

  • CharleyX

    Lemme see… We’re going to increase production costs but no one is going to have to pay for it. WOW! Tell the Fed about this amazing new discovery!

  • Yung Patriot

    If you pay attention and read the article you will see that this is not an unbiased analysis but rather an ad, written by the CEO of Jobaline, Mr. Salazar. He promotes his company towards the end of the ad.

    His big assumption is that turnover in minimum wage jobs will be decreased by paying more. However, the reality is that turnover will continue at the same rate, as long as all the minimum wage jobs are paying the same. Why feel stuck in one low end job, when you can switch to some other job and get paid just as much? Raising wages would only make sense if those jobs weren’t getting filled, but this is not the case.

    • Michael B.

      That is exactly what I thought, a self-promoting ad by Mr. Salazar.

    • the_caganer

      you miss the key assumption, low wage employees are all good employees, there is never an employee that is hired and does not work out. How many McDs employees are let go because they flake out? None in Mr. Slazars world. an absurd argument.

  • Gladys

    I am not sure how the employee pool changes. We are already attracting qualified candidates at the current pay scales. Do they just go away and new, more qualified candidates appear or do we simply pay the candidates we are getting a significantly higher wage?
    Some jobs in some industries are not going to provide a living wage. If people have put themselves in a position where that is the only job they are qualified to perform and we raise wages to accommodate their needs rather than there skills, are we then making it easier for people who might be otherwise motivated to get greater skills to not bother?

  • georgebeach

    But it will!

  • althotos

    I think this argument is a bit hollow regarding inefficiencies in the hourly system. I am an hourly worker, but I am a highly-skilled, technology worker. I command an hourly rate dictated by the marketplace based on my skill set and not some arbitrary wage structure. In my career, I’ve found that different different cities and different markets can dictate differing hourly rates for the same set of skills. Now, setting a minimum wage of 15.00/hr., for unskilled labor undercuts everyone else who is a skilled hourly worker. This essentially means that a company, entity or organization would be forced to pay 15.00 an hour for the most trivial of work such as flipping burgers, busing tables or sweeping floors.

    Any company or organization that is concerned about it’s bottom line in any competitive marketplace is going to look into two areas to accommodate a 15.00 minimum wage. It’s either going to raise prices or cut back on labor. If it’s a the local deli on the corner that employs 6 people, they are either going to have to raise the price of their food and sandwiches or they are going to have to cut back. If there is a competitor across the street, more than likely the deli will not be able to raise prices for fear of losing customers. So, instead of 6 full-time employees, they might choose to cut back to 5 full-time employees or cut the hours of the 6 full-time employees so that they can remain competitive at the 15.00 rate.

    I’m not sure how larger chains like McDonald’s and Wendy’s are going to respond. These companies may raise the cost of their products and pass them along to consumers as they have been for many years, yet still remain competitive. Most customers who frequent fast food seem to have few other alternatives, so they will grumble and complain, but will continue to buy their fast food at these establishments. Also, these companies have already gleaned maximum efficiency from their operations, so the argument presented in this article won’t work for them.

    By the way, I’m a progressive who believes in social causes. I also have an MBA. I’m just not sure that legislating 15.00 an hour is going to fix either the economy or the social problems of the poor. Both of these things have much deeper issues at their root, which won’t be fixed with a minimum of 15.00 an hour.

    • Saym Guy

      Unfortunately progressive politicians are not cut from the same cloth. Logic is not their strong suit.

  • Michael B.

    What a silly article. The author only offers conjectures and no facts. His high-tech solutions will not apply to most small businesses, which are retail. The simple fact is that raises in minimum wage will and always has resulted in increased prices. Small businesses cannot just absorb these costs without passing it on to the consumers.

    • Angela

      I totally agree with you. I’m the owner of an in-home preschool with no major costs involved in acquiring and training new employees so I don’t see how I’ll be saving money here. I will have to pass the cost onto the customer in order to stay in business. Overhead increases every single year so an increase in labor costs will add significantly to my already built-in price increases. Tuition will have to increase. So the people who are making more money with the increase in minimum wage will just pass that increase on to purchase the even more expensive goods and services. Lets see how that pans out.

  • Saym Guy

    Who let this clown post this article? Over glorified self promotion based on one big assumption with little to no facts to back it up.

  • http://www.xconomy.com/seattle Benjamin Romano

    I’d like to address the comments about this being a self-promoting article. First, I solicited this piece from Luis because he and his company has a unique vantage point on the hourly wage debate taking place here in Seattle and elsewhere. I wanted this to encourage debate about this topic, and I’m glad to see that it has. Second, his original draft made no mention of Jobaline. I urged him to add something about the company’s technology solution to the inefficiencies he describes in the hourly worker hiring process. He resisted this, but ultimately agreed to a brief mention of the company in the final version that was posted here.

  • Luis

    Thanks for taking the time to read the post and offer feedback and generate dialog. I list several facts in the article: 1) There are 76 million workers 52m hires/yr (BLS data) and to process over 20 applications per every job, companies go through 1B job applications. There are several inefficiencies associated with that and I listed those as brief as possible due to space limitation.

    Comments are absolutely correct in terms of price increases and how SB cannot just absorb it by improving recruitment. Actually SB have very low attrition compared with large companies. But the core analysis is related to the large employers that generate most of the jobs in the sector. As per BLS data: 17,000 US companies (0.3% of total) generate 51% of the jobs and 10% of the companies generate 86% of the jobs. In large companies, attrition is over 50% and 200% in some cases and any inefficiency in recruiting adds-up.

    I am just proposing a potential area of savings if companies are forced to increase salaries, as in most cases, as I refer to in the article, the business cannot just raise prices to overcome the increase.

    Nowhere in the article I say the minimum wage increase is good, fair, easy to embrace and that will have zero impact. I just aimed at providing visibility into one area where billion of USD are spent every year and that could help companies to deal with the challenges that will result from a high increase in their cost structure.

    If a company is already best in class in terms of recruiting their hourly-wage workers, then this is not an area to explore for further savings; but for many this could be helpful.

  • Negotiable

    Why must every increase in wages necessarily be passed on in its entirety to consumers? Why can’t some of it, at least, come out of the profits of owners and share holders?