Minimum Wages Are On The Rise

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We’re experiencing the lowest unemployment and tightest labor market in decades. Employers are finding it harder and harder to hire and retain quality workers. Companies are responding by raising starting wages, with many including Target, Costco, and Amazon, committing to a $15 an hour minimum wage by 2020.

As retail wages rise, companies higher up in the white-collar food chain also feel the pressure to raise starting salaries. Bank of America announced in April that it will raise minimum wages for its employees to $20 an hour in the next two years. In addition, they’ll freeze health care cost increases for lower-paid workers.

The hourly pay rose to $17 on May 1 and will increase to $20 by 2021 as announced by Bank of America CEO Brian Moynihan. The company starting pay was $15 an hour in 2017.

The Cost of Minimum Wages

Although these raises will increase the cost of labor significantly, especially for very large companies, the cost of turnover is much higher. HR professionals have tried to find a formula for calculating the cost of losing experienced workers. Not to mention, they have to factor in the cost of recruiting and training replacements. In addition to tangible costs such as running ads, administering assessments, and background checks, there are significant intangible costs.

Consulting firm Deloitte estimates the cost of losing an employee can range from tens of thousands of dollars to 1.5–2.0 times the employee’s annual salary. These costs include hiring, training, ramp time to peak productivity, the loss of engagement from others due to high turnover, higher business error rates, and general culture impacts. Companies also must factor in the cost of onboarding a new person (including training and management time). Lost productivity can compound costs. A new staff member may take 1-2 years to reach the productivity of the previous worker.

It’s almost impossible to quantify the effects of what didn’t happen due to a new worker’s inexperience. Lost sales and ineffective customer service can cause drops in retention and lost business.  Studies have demonstrated that workers are an “appreciating asset,” meaning that they become more valuable with experience over time. When an employee stays on the job just a short time, the company loses more of their potential future value.

Replacing Workers Comes at a Price

And the loss is higher for higher-skilled workers. A paper from the Center for American Progress, determined that the average economic cost of turning over a highly skilled job is more than double the cost of a year’s compensation for that role. According to case studies, the cost of replacing a worker earning $75,000 a year or less averaged about 20 percent of the annual salary. This figure applies to almost 90 percent of U.S. workers.

Higher starting salaries do more than attract the best talent currently in the market. They also bring people who have not been a part of the labor force back into the job market. According to the Bureau of Labor Statistics data, 266,000 men and 158,000 women described themselves as discouraged by their job prospects in 2018. Rising wages have a positive effect on labor market participation. This has been trending downward since the Great Recession of the late 2000s.

According to a 2018 Brookings Institution report, “For the last three years, amid a strengthening labor market, the prime-age (25- to 54-year-old) labor force participation rate has increased.” The participation rate, 82.0 percent as of June 2018, is now close to recovering entirely from its cyclical downturn following the Great Recession. This comes after a decades-long decline in male prime-age participation and a 15-year slide in female prime-age participation.”

Good news all around, at least for large companies willing to invest in retaining talent rather than chasing it.