The Unintended Consequences Of Minimum Wage Increases

As politicians and businesses trip over each other to see who can raise the minimum wage the fastest and to what extent, the typical “totally unforeseen” consequences of central planning are being felt.

From a human resource perspective, workplace tension is on the rise.

Employees are increasingly expressing to managers that they’re unhappy with the fact that new employees are starting at a base similar to what they are now earning, after months or years of hard work. Just as we stated a long time ago, raising the bottom tier pay will now make more senior workers feel underpaid. “They felt that they weren’t able to get compensated for what they learned.” said Catherine Knowles, a district manager for Mud Bay Inc. “As you’re raising that bottom, it’s affecting everybody.” Knowles added.

Knowles went on to say that the only response that she can give the disgruntled employees at the moment,  is ironicallyI’d love to be able to pay you a dollar more but there are costs. We’re still in the business to make money.”

Which brings us to the economic consequences. With the increase in baseline costs, businesses are now forced to decide whether or not take an additional hit to the bottom line and increase the pay of their more experienced, more skilled workers, knowing that if they don’t they will look for work elsewhere. Also, if businesses do raise the pay for those in higher level roles, where are companies going to drive cost out in order to at least try and protect profit; Said otherwise, how many layoffs must occur in order to play this minimum wage game. At her three Tropical Smoothie Cafe locations, Laura Jankowski raised entry level pay for employees in order to comply with New York State law, which now mandates a $9.75 an hour minimum wage. Jankowski then had to increase the wages of the cafe’s shift leaders to $10.75 an hour so they were at least compensated a bit more than a new employee. “I can’t punish them” Jankowski said.

Tropical Smoothie shift leader Danny Zambito said that he’d likely leave the job if a shift leader got paid the same as an entry level position. “I personally would feel a little frustrated, we are putting in that extra work.” Zambito said.

Not everyone is handling the issue like Laura Jankowski of course, as we’ve detailed extensively (here andhere), companies such as Wal-Mart are laying off workers in droves after the decision was made to arbitrarily raise the minimum wage for all employees.

As the knee-jerk reactions regarding how to handle protestors yelling for an increased living wage while spilling their lattes and checking their iPhone’s continue, these unintended consequences are going to become more and more intense. Layoffs will continue, higher prices (of labor) will be passed on to customers, and human resources will have to be bolstered in order to deal with increased employee complaints. All of which do not bode well for an economy already struggling to keep any semblance of growth alive.