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The Hidden Costs of Minimum Wage, and Why Small Business Should Care


It is all over the news lately – big companies like McDonald’s and Wal-Mart are facing strikes from their workers and political pressure across the board to increase the amount they pay their part-time workers. These companies often pay the Federal minimum wage and leave it at that, and the bigger debate gripping the country is whether or not that rate needs to increase across the board.

For most small business owners, the first, knee-jerk reaction is probably in line with what McDonald’s and Wal-Mart are arguing – that they can’t afford that kind of unilateral increase without taking serious hits to the bottom line. And while for large companies, that just means less profit, for a small business, it could mean the difference between profit or loss – or staying open or closing the doors.

But does it really mean that kind of loss?

Sure, on the surface, it does. It is a direct expense that comes out of the profits every week, month or pay period. It is a tangible cost you can measure, so it is logical for a small business to look at that and base decisions around it. But that isn’t the only cost to consider.

First of all, have you ever sat down and figured out the cost to acquire and train a new employee? The cost of classified ads, usually in multiple places; the cost of your time to go through resumes and identify the most likely candidates; the cost of your time to sit down and interview every single one of those candidates; the cost to train them; and the cost of lost productivity while all this is happening, and until they are fully trained and able to work without your supervision. These are all hidden costs that most small business owners never stop to consider.

Now, compare that number to the increase in the minimum wage to what is consider a “living wage”. Employees would have less reason to leave, meaning they become more productive over time as they get comfortable with your systems and products. They stay long enough to start having ideas for ways you could improve that will ultimately increase your revenue. Maybe they even stay long enough that you can hand off complete responsibility for some of the work you do now, freeing you up to work on other projects that, again, will ultimately lead to more revenue.

Sure, none of those costs are immediately tangible. You can’t look at your ledger and point to the exact line item where you have saved or lost money like you can with the kind of increase that comes with a minimum wage hike. But I strongly encourage you to spend a little time calculating those hidden costs. And then multiply them by the number of employees you would cycle through in a given year. Look at that number, and compare that against a wage increase for a single employee over that same year. You will be surprised at the savings.

Don’t let the initial knee-jerk reaction to a single line item shape your opinion in this national debate. Take a few minutes this week to really examine how it will effect you, and then decide for yourself if having loyal, happy employees for few extra dollars a month outweighs the cost of constant turnover.

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