APU Business Original

Do Higher Wages Really Mean More Money for Employees?

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For some time now, many people have pushed for the minimum wage to be increased to $15 per hour. The main argument used to convince society is that more money per hour will equate to a better life for many workers. But the big question here is if raises are given to an organization’s employees, who really pays for it?

Higher Wages for Employees Are Usually Passed on to Consumers

Many businesses typically raise their customer costs due to changes in operating concerns or because employees want more money.

In 2019, for instance, Disney employees voted for wage increases. But did Disney actually cut its profits to pay workers more money? No.

Instead, Disney increased amusement park ticket prices 5-10% that same year. This price increase helped to cover the expense of raising employees’ wages.

As a result, consumers are the ones really paying for wage increases for Disney employees. In addition, the levels of profit for Disney will not really change, and the changes to employee wages will not really cost the company anything.

Disney might have a very small group of consumers cut back on their buying tickets for a time, but most companies already plan for this type of change in customer buying habits.

Raising the Minimum Wage Can Result in Higher Consumer Expenses

Imagine that the minimum wage is a dollar, and the products that minimum-wage workers typically buy cost a dollar.

Now imagine that the minimum wage for those workers is increased to $5 per hour. But now the same products that cost a dollar are now raised to $5 as well.

While those workers now have higher wages, what they want to buy costs more. In the end, the economic change is nothing and the minimum-wage workers do not benefit from the change.

If everyone starts making more money per hour and businesses follow suit by raising prices on their products and services, the net result is that no extra money will be available to consumers. In fact, the same person making the same salary might have higher expenses and make less in take-home pay.

Some Businesses Respond to Higher Wages by Cutting Employees’ Hours

Another way employers save money when they give wage increases is to cut back on the hours given to workers. For instance, imagine that a worker makes $10 per hour and work 40 hours per week. That’s $400 per week.

But let’s say that the employer raises the worker’s salary to $15 per hour but decides to cut back on the employee’s hours to 25 hours per week to afford the change. Consequently, the worker would make $375 per week — $25 less each week.

The employer might be paying more money to the worker. But with that raise, the organization might also expect more work to be done in less time. Also, a real concern is if employees will abandon their employers because of extra workloads and the possibility of obtaining higher wages elsewhere.

Cutting Back on Expenses Can Sometimes Backfire for Employers

We know that employers are always looking for ways to cut back on staffing and save money. But cutting back on employees to reduce expenses can often backfire for employers. Disney is a good example of a failure in this regard.

The organization originally had professional photographers to take photos of guests with Disney characters. But in an effort to save money, the photographers were let go, and photo boxes were installed at the parks to automatically take pictures for guests who wanted to be photographed with Disney characters.

The big problem with this move was that many of the pictures were not at the same level of quality as the images taken by professional photographers. In the end, some of these photo boxes were removed, and the photographers were rehired for some parks. But given Disney’s creativity and profitability, Disney leaders will find a way to still use these photo boxes and still make partial staffing cuts.

Hostess Went Bankrupt Because It Couldn’t Afford Higher Wages for Employees

Another example of problems with higher wages for employees is Hostess. Back in 2012, Hostess was in trouble financially, but their employees still wanted wage increases. Hostess ended up closing and going bankrupt, because it could not afford to give workers the higher wages they demanded. The company was later sold, so employees ended up with no wages at all.

Higher Wages: A Sensitive Issue for Everyone

Everyone wants to make more money, and there is nothing wrong with this desire. We all should have the right to make the most money we can.

But ultimately, higher wages are a sensitive issue for companies, workers and consumers. There needs to be more evaluation done on the complex situation of business finance, rather than just focusing on the issue of higher wages. But with some creativity by business leaders, it may be possible to find a sweet spot for all concerned parties.

Dr. Mark Friske is a part-time instructor for the Wallace E. Boston School of Business. He holds a B.A. in pre-law from Bob Jones University, an M.B.A. in business administration from Capella University and a Ph.D. in organization and management from Capella University.

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