Managing Minimum Wage Increases

November 8, 2021

Managing Minimum Wage Increases

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.

Is the Minimum Wage Good?

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…

Manufacturing with Minimum Wage

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.

Less Hours and More Workers

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:

  • Decreases in employee motivation
  • Lower employee skill development
  • Decreases in the firm’s ability to attract high performers
  • Increased turnover
  • Decreases in employee productivity

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.

More Automation

In every manufactory, any task that can be automated should be automated or be in the process of being automated. This applies from sending customers quotes to nesting work orders.

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.

More Subcontracting

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.

Conclusion

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:

  • Adding more part-time workers to help balance the workload, though managing the added work force will require better planning.
  • Investing in automation doesn’t have to break the bank with added robotics and the maintenance costs involved. It can be something like automating daily processes and systems with scanners, monitors, and an ERP system.
  • Adding subcontracting operations to your production line can more than ease the added wage costs

OnRamp ERP can help you manage all these changes while ensuring your business is future-ready with:

  • Centralized data and reporting with smart dashboards
  • HR module with skills and training data that can help you manage your workforce and ensure your staff are where you need them to be
  • Subcontracting operations module that tracks your parts and when they need to be routed to your subcontractors or received for further processing
  • Complete Quote-to-Cash automation with EDI ensuring that all orders are sent and received with minimal user input.

 

References

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

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