Prepare Now For Imminent Minimum Wage Increases

In Chicago, Mayor Rahm Emanuel recently ordered city contractors to increase workers’ minimum wage. From the current $8.25 an hour, the new minimum wage will go up to at least $13 an hour. The Mayor’s action will affect around 1,000 workers, and a proposed ordinance would bump the minimum to that level for approximately 400,000 people who work in Chicago by 2018.
           
Chicago isn’t the only city boosting workers’ pay. Seattle, Philadelphia and the entire state of California have enacted minimum wage hikes, and similar initiatives around the country will likely lead to more increases. Community leaders support the minimum wage increases, contending a living wage is needed.
           
Minimum-wage workers are often seen as a high-turnover group, with employees always seeking higher-paying positions. Some studies indicate a higher minimum wage will act as a cost saving strategy and reduce turnover — lower turnover rates translate into lower training costs and improved expertise as workers remain on the job longer. Regardless of personal opinions on the pros and cons of minimum wage hikes, they seem to be unavoidable.

What can companies do when confronted by service providers requesting a cost increase due to minimum wage increases?

Here are some recommendations to offset the potential impact of these increases.

  1. Examine the existing Scope of Work documents with customers or vendors to clarify work expectations. Revisit these agreements describing work activities, deliverables, timelines, pricing and quality requirements to identify savings opportunities. By focusing on essential services and reducing or eliminating less important tasks, the current cost levels could possibly be maintained.
  1. Reexamine market prices for services.  When were the services last put out to bid?  Are there other providers available for consideration?
  1. Evaluate service providers' capabilities objectively.  Are there industry benchmarks available for comparison?  How does the current provider stack up against industry norms?  Has the current provider embraced new technology to help remain competitive?
  1. Calculate potential increases accurately. A 10 percent minimum wage increase should not mean a 10 percent increase in the total cost of services. Direct labor is only one component of the total cost of services.
  1. Identify offsetting cost reductions in operating expenses as a way to diminish the overall impact of minimum wage increases.  For example, decreasing office supply expenses could offset cost increases in landscape services.

           
Minimum wage increases are gaining momentum. Business leaders should prepare now by identifying potential cost categories that may be impacted by pay increases for low-wage workers.

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