Washington Times

The negative consequences of a small business ‘paying a fair wage’

By June 10, 2021June 17th, 2021No Comments

(This article originally appeared in The Washington Times)

The most common response I’m seeing on social media when small businesses complain about the lack of available labor is to simply “pay your people more!”

“If a small business can’t afford to pay its employees a fair wage then they shouldn’t be in business,” one person tweeted at me recently.

Many agreed with him. They complained about the working conditions at their employer and that they can’t live on what they’re being paid. I have no question that these complaints aren’t true. Some business owners I know took their side, with one even claiming that he increased his hourly rate for new workers to $25 an hour and was “flooded with applications.”

So is it as simple as that? Just pay your people more and everyone will stop collecting unemployment and come back to work? As with all things, the answer is not so simple. In business, it usually comes down to math. And for many business owners, the math doesn’t work.

When a business owner has to increase the wages for new employees then that owner will also have to offer that same increase to all employees just to keep things equitable. So increasing an hourly rate from, say $12 to $20 for a new hire, is ultimately going to translate into a 66 percent increase in total wages throughout a company.

But that’s not all. When you increase wages, a company will also have to pay a commensurate increase in federal and state taxes as well as worker’s compensation and unemployment insurance. If a company has a retirement plan, where contributions are calculated based on wages, those costs will go up too. Overtime expenses will, of course, also increase. So will other overhead expenses tied to payroll.

Say you’re a service business, like a landscaper or roofer. If you sell $1,000 of services your total wages ($300) and materials and overhead costs ($300) are usually about $600 which means your margin is generally around $400 (40 percent in the industry is common). If your wages increase 66 percent to $500 then your margin falls to $200, or about half what it was before. So basically by paying a “fair wage” your profits can drop as much as 50 percent.

A 50 percent drop in profits means the business owner took a 50 percent cut in her compensation. This is catastrophic. Few companies can absorb this without folding, and putting those same workers demanding a “fair” wage out of work. No one wants to see that. So what to do?

She can’t cut her materials costs. In fact, in these times of rising inflation she’s actually paying more and suffering another profit drop as a result. Her overhead, which is made up mostly of employee related costs mentioned above, is also going up. Maybe she can negotiate lower rates on other expenses but unfortunately her suppliers — both big and small companies — are facing the same profit squeezes and are extremely unlikely to reduce their costs for a small customer.

So the only thing she can do is raise her prices in order to “pay a fair wage.” Sounds simple right?

Not when you’re competing against companies located overseas with much lower cost structures. Or against big U.S. companies that can absorb costs more easily. Or even against other small and mid-sized companies that may be located in parts of this country that have a lower cost of living. The landscaper is also fighting against unscrupulous competitors who pay people under the table or hire undocumented workers to keep their prices down. Or, in the case of a construction firm, bidding against other companies for government projects that are mandated to take the lowest offer.

So to my friends on Twitter and Facebook who don’t run small businesses this is the reason why “paying a fair wage” isn’t as easy as it sounds. Plus, who’s to say what a “fair wage” is, anyway? If you’re an unskilled worker doing a job that can likely (and will) be replaced by a machine is the value of your work equal to $15 or even $20 an hour?

A lot of people online say that a business that can’t pay a “fair” wage should not be in business. Is that fair? What about workers who don’t have skills? Why do they get a pass? The people that are complaining the most to me about getting paid a fair wage aren’t attorneys and architects. They are at the lowest rung of the employment ladder.

Getting skills is expensive, you say? I agree. But don’t blame the small business owner. We’re not in the education business. Blame the people in the education business. Blame the shameless higher education industry that has fleeced generations of their tuition dollars for decades while overpaying their staff and hiking tuitions so much that a good education has become unattainable for so many and an entire generation is buried under excessive student debt while fat cat administrators and university bureaucrats are enjoying summers off and collecting generous benefits.

A small business owner is a small business owner because she took risks. She invested her savings. She likely left the comfort of a corporate paycheck. She put her house up as collateral. She’s sweating revenues and payroll. She’s carrying all of the liabilities. Does she get paid a “fair wage” for all of this? Instead of complaining, maybe workers can be doing more to help their bosses by improving themselves, doing a good job and proving that they’re valuable and indispensable enough to earn more. To me, that’s the best way to get paid a “fair wage.”

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