- A growing trend. Twenty-five U.S. states will raise their minimum wage this year.
- Some sectors more affected than others. Industries with a significant number of lower-paying jobs, such as food service, hospitality and retail, may experience a more pronounced effect of the rising minimum wage.
- Companies will face compression concerns. Wage compression often follows minimum wage increases, and organizations need to plan strategically to minimize its effects.
Twenty-five U.S. states are boosting their minimum wage in 2024, with baseline pay bumping up to at least $16 an hour in California, Washington and parts of New York. The federal minimum wage remains at $7.25 per hour.
In 22 states, new minimum wages took effect on Jan. 1 (see sidebar). Nevada’s and Oregon's new rates will go into effect on July 1, while Florida's will increase on Sept. 30. Five states — Alabama, Louisiana, Mississippi, South Carolina and Tennessee — do not have a state minimum wage.
Even if your organization operates in one of the states that didn’t raise its minimum wage this year, experts say you should still pay close attention to how these hikes will affect the labor market.
States That Raised Minimum Wage on Jan. 1
- Alaska: $11.73
- Arizona: $14.35
- California: $16.00
- Colorado: $14.42
- Connecticut: $15.69
- Delaware: $13.25
- Hawaii: $14.00
- Illinois: $14.00
- Maine: $14.15
- Maryland: $15.00
- Michigan: $10.33
- Minnesota: $10.85
- Missouri: $12.30
- Montana: $10.30
- Nebraska: $12.00
- New Jersey: $15.13
- New York: $15.00 ($16.00 for New York City and the counties of Nassau, Suffolk and Westchester)
- Ohio: $10.45
- Rhode Island: $14.00
- South Dakota: $11.20
- Vermont: $13.67
- Washington: $16.28
Contributing Factors
Several factors are contributing to the widespread increase in minimum wages, according to Tauseef Rahman, a career practice growth leader at Mercer.
High demand and low availability in the labor market, particularly in industries like health care, are leading the push, he said. Other factors, such as inflation, are also at play.
“Along with the rising cost of living and economic policy objectives to stimulate growth, all play a role in driving these increases,” Rahman said.
While the impact of these wage hikes will be felt across different geographies and industries, Rahman noted that “industries with a significant number of lower-paying jobs, such as food service, hospitality and retail, may experience a more pronounced effect.”
Unintended Consequences
There’s a certain irony that can play out when the minimum wage is increased, said Justin Sun, a global compensation adviser at Expedia.
On their face, these wage hikes should improve workers’ economic situations. However, the increased costs for businesses could end up hurting employees in the end.
These rising rates significantly increase organizations’ operating expenses, especially for companies in industries such as retail and hospitality, which are often the primary employers of minimum wage earners, Sun noted.
“[Those employers] then end up having to increase prices of goods and services to cover increased labor costs,” he said. “And for small businesses whose profit margins are stretched thin, they may have to resort to cutting staff or hours worked to ensure that they can continue to operate.”
Sun also pointed to another unintended consequence of increasing the minimum wage: Certain industries could attract overqualified job candidates for roles that would typically go to individuals who have less experience or who are earlier in their careers.
“In other words, individuals with less professional work experience could experience increased competition when applying for jobs,” he said.
Compression Concerns
Wage compression is another issue employers face whenever the minimum wage increases. Compression occurs when employees’ salaries don’t properly reflect differences in workers’ knowledge, skills, experience or abilities.
While avoiding pay compression completely may not be possible, strategies exist to manage it effectively, said Mercer’s Rahman.
“We have worked with clients to address the ripple effects of wage increases on more senior employees,” he said. This might include adjusting wages of more experienced employees to minimize compression, as well as redesigning jobs to ensure that increased wages come along with the tasks and activities that are of higher value.
Addressing compression is an “age-old compensation concern” that became top of mind following the recent upheaval in the employment market, said Lindsay Wiggins, director of work and rewards at WTW.
Having strong analytics and pay administration is more important than ever when addressing compression, she said, and employers need to be deliberate in setting their annual salary budgets. WTW even advises its clients to consider compression when distributing annual salary increases.
“Some organizations also may start questioning whether it’s the best use of their limited salary budget to provide increases to all newly hired employees,” Wiggins said.
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