Minimum Wage Hikes Reduce Leadership

Walmart is set to raise its base pay in 1/3 of its stores due to state increases in the minimum wage.  Although many new employees will see a pay hike, people who are already earning over minimum wage will be unaffected.  This creates a “pay compression” between entry level jobs and hourly workers who have taken on leadership roles and served the company and its customers for many years. Most departments have a set budget for wages. If they are required to pay more for entry level workers, workers who have worked for the company for years will see their wages stagnate. I have written before about the unintended consequences of raising the minimum wage, and this is another great example of how increases in the minimum wage can hurt more than it helps.

Currently the minimum wage in Michigan is $8.14.  Over the next few years it will gradually increase to $9.25 by 2018. At the same time there is talk of increasing the federal minimum wage to $10.10  An experienced leader in many retail settings, such as Walmart, may earn $12 an hour.  Before the rate hike a new worker could see that it is possible to work their way up to a $4 an hour raise, now, after the hike, only a $2 an hour raise is possible.  Workers who already are in leadership positions are doing more work, at a higher responsibility rate than new workers and don’t get a significant benefit for doing so.  For someone in that spot the question should arise, “Is the extra responsibility worth the little increase in pay, or does it make more sense to step down, or seek employment elsewhere?”

When I worked at KFC year ago, a shift manager earned only 25 cents more than an entry level worker.  I couldn’t see taking on the extra responsibility for an extra $10 a week. Needless to say I could not see taking the spot, and very few people were willing to step up to become managers.  When the first round of minimum wage hikes went through in 2006, All raises were stopped for employees. Before them we received a bi-annual raise. It was usually a small raise, but at least it was something.  Even though I had worked for the company for 2 years and completely ran the kitchen, I was paid the exact same amount as any new hire.

When the minimum wage is increased, low skill workers earn more, and higher skilled workers wages stagnate.  Increased minimum wages result in higher unemployment and make it more difficult for people to enter the workforce.Would you volunteer for more responsibility if the pay rate reflected only a very small increase compared to entry level workers? I think companies that increase the wages of new hires without adjusting up the wages of experience employees are setting themselves up for a major loss of key personnel.

What are your thoughts on increasing the minimum wage? Do you think it is “right” or even smart for a company to increase wages for new workers, but leave brackets for experienced employees untouched?

 

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John uses the free tool Personal Capital to track his net worth and posts quarterly updates on his finances. Check out the Action Economics archives section for all past posts.

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