So… They raised the minimum wage. Or are about to raise it. Like the pandemic hasn’t hit your bottom line enough, now you have to worry about added labor costs.
Across the world, there are politicians, unions, and other social groups talking loudly and frequently about the need to raise the rate. But in your globally competitive marketplace, can you afford the increase to your prices brought on by higher staff rates if your region sees a hike while the rest of the world can still get by with peanuts for paychecks?
And you know what? You get it. You know your workers and they are struggling too. As an example, the Ontario Living Wage Network recently published updated data on the minimum hourly wage required to live in 23 regions across Ontario and, according to their calculations, the Ontario government’s raising of the minimum wage to $15/hour wouldn’t be enough for workers paid that amount to live in any of them.
This, of course, is not a condemnation of the wage hike. It is merely showing that inflation keeps going and as inflation does what it does, costs go up. But your returns should also improve.
There have been multiple attempts to understand the economic effects of a minimum wage hike, with some research suggesting that the increased buying power leads to an economic boom while others suggesting that increasing the minimum wage leads to more unemployment as businesses automate more and hire less.
Interestingly, research from 1992 shows that a minimum wage increase in New Jersey positively affected the spending power of the average fast-food retail worker, and as such the profits and number of employees at their stores, when compared to their neighboring state Pennsylvania which did not have such an increase.
However, this is study is about fast-food workers in 1992.
As a manufacturer in 2021, you have more options…
Back to the problem at hand: your labor prices are about to jump.
What can you do?
There are a few options available to the average manufacturer, each with its own pros and cons.
A recent study from the Harvard Business Review found that when California raised the minimum wage, retail businesses across the state raised the number of workers and lowered the number of hours paid per worker. This led to business having more flexibility in the number of workers on the floor and also having to pay less overtime.
While more workers with erratic scheduling did decrease the labor costs for the business (because of the US pension and health care laws) it also led to negatives, such as:
Overall, in a LEAN manufacturing organization, any cut to productivity quickly leads to increased waste and decreased profits. For this option to be viable, your organization needs improved labor planning and reporting to ensure careful monitoring based on the skill requirements for your daily tasks and the training requirements for your employees.
Without a doubt, adding more automated devices will help decrease the number of staff you need to produce one part. However, adding automation can be costly. While most think of automation as a fleet of painting robots, the latest CNC machine, or a brand-new laser cutter often automation can be much simpler.
When looking to acquire technology, automating your processes or systems is something that greatly improves worker productivity while cutting costs. A better ERP system can help improve productivity and cut costs while being future ready.
This increase in productivity usually leads to lower prices and more customers, which leads to having to hire more staff and a more successful business.
Mass production and specialization are two of the greatest forces to decrease costs. But specializing in all facets of production is a capital investment that even the largest of companies don’t consider. For example, auto-makers subcontract the manufacturing and assembly of many of their parts to a global chain of specialized shops.
Here, it pays to learn lessons from market leaders. Outsource some of your more cumbersome or less specialized operations to local or regional players. Increasing the amount of subcontractors you deal with can help decrease your labor while adding another headache with order tracking and payments.
Better communication with your subcontract vendors and internal order tracking and management can greatly simplify your subcontracting operations.
Increased labor costs that come with an increase in the minimum wage should be looked at as an opportunity to evolve your business while retaining your better employees. This can be done by:
OnRamp ERP can help you manage all these changes while ensuring your business is future-ready with:
Qiuping Yu, Shawn Mankad, Masha Shunko (June 10,2021), Research: When a Higher Minimum Wage Leads to Lower Compensation
Sean Davidson (Nov 1, 2021) Living wages required for basic lifestyle in 23 Ontario regions revealed
David Card, Alan B. Krueger (Sep 1994) Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania
For more information about how OnRamp ERP software can add value to your business fill in the contact form below. A member of our support team will contact you within 1 business day to discuss any questions you have.