Wage increases: How policy affects manufacturers

OTTO Motors

Labor is a variable, complex expense within the manufacturing sector that holds a great deal of influence on how an organization operates. Even incremental changes in minimum manufacturing wages can significantly affect manufacturing overhead and impact profit margins. Currently, 21 states are slated to put minimum wage increases* into effect during the coming year. Will your operation be impacted? And if so, how will you make changes to your processes in order to remain competitive?

This post is part of our series "How Policy Affects Manufacturers".

California minimum wage keeps up with the times

Photo credit: Sacremento Bee

Photo credit: Sacremento Bee

Adjusted for inflation, the current minimum wage in the United States is at the same level as it was in 1956, and reached its maximum inflation-adjusted value in 1968**, when it was worth $10.89 in today's dollars. Had the 1968 minimum wage grown at the same rate as the cost of living, it would be $16 today. And if it were aligned with worker productivity, the minimum wage would be $22 today, triple its current level of $7.25 per hour.

A lot of eyes are watching California right now as the minimum wage for all industries in the state, including manufacturing wages, will be increased annually starting this year. From 2017 to 2022 the minimum wage will increase for employers having 26 or more employees. Gov. Jerry Brown wants to raise the minimum wage to $15 an hour by 2022 (businesses with fewer than 26 employees would have until 2023 to hit that target). The deal must be approved by the state’s legislature, and the opposition from the business community and business ownership groups has been well documented. This said, the discussion brings about a sense of urgency for manufacturing operators as changes will need to happen quickly in order to compensate wage increases if Brown’s proposal is approved.

Today, about 600,000 of California's 1.6 million manufacturing workers earn less than $15 an hour. “That's by far the largest block of affected manufacturing workers, and it's potentially a key metric because it points to how the size of California's proposed increase reaches out to different employment sectors than a smaller increase would,” writes LA Times’ Michael Hiltzik. 

Do minimum wage increases mean price hikes for consumers?

Meanwhile, in New York, Gov. Andrew Cuomo has proposed economy-wide minimum wages of $15 in New York City by 2019 and in the balance of the state by mid-2021. In assessing the impact of this proposal on workers, businesses, and consumers, UC Berkeley estimates that by mid-2021, payroll cost increases will average 3.2 percent over the entire for-profit economy. If the impact appears minor, it’s because many companies already pay over $15 per hour and because many of the workers who will get pay increases are already paid more than $9 per hour.

UC Berkeley notes that businesses could absorb the remaining payroll cost increases by raising prices slightly—by 0.14 percent per year over the phase-in period—and says this price increase is “well below” annual inflation of nearly 2 percent over the past five years.

For manufacturers and business operators, raises in price to maintain profit margin may seem like a logical necessity, but customers may not be so understanding. Luckily, the manufacturing has entered a new phase of development – Industry 4.0 has ushered in a new era of manufacturing intelligence that enables operators to implement technologies and processes to optimize workflow. Therefore as manufacturing wages increase employees can be placed in high value tasks that generate income for the operation, while technology can be used to do repetitive, low-value jobs like material handling, from picking up garbage to moving carts from receiving to the assembly line. 

Automation will absorb manufacturing wage increases

Photo credit:

Photo credit:

In assessing how a $15 minimum wage would impact the manufacturing sector, Moody’s Analytics’ Adam Ozimek points out that 5.3 million manufacturing workers across the U.S. made less than $15 an hour in 2014. This represents 35% of all manufacturing workers. Data suggest that if the minimum wage was increased to $15 an hour across the U.S., it would impact a significant number of manufacturing workers, with some states being hit harder than others.

“This reflects the fact that lifting the minimum wage to $15 an hour would not just be quantitatively larger than previous U.S. experience, but qualitatively different in that it would affect a different set of workers and industries,” Ozimek writes. “Leisure/hospitality and retail make up 54% of the workers who make less than $8 an hour, but only 34% of those making less than $15 an hour. As the minimum wage rises, it affects other sectors. For manufacturing, at least, the effect is likely to be greater.”

The groundswell in favor of a significant hike in minimum wage is currently in full swing across many states, and the impacts that these new laws will ultimately have on the U.S. manufacturing sector remain uncertain. However, the majority of mindshare is focused on possible profitability losses and cost increases. Manufacturers should be thinking about how to optimize dollars-per-employee. Put simply, a high-cost, low-value employee could wind up becoming an especially big liability in an era of higher minimum wages.

And because there is no perceived value in manual material transport, companies should also focus on their manufacturing overhead costs versus their manufacturing labor costs. Simply “throwing people” into new jobs when labor rates are high is not a viable strategy, not to mention there is often difficulty finding and retaining people for such roles in the industry. Every incremental cost increase can have a radical impact on profitability; the value of labor must be repositioned to create the most positive output for every dollar spent. Using automation, for instance, companies can hone processes to not only be more effective, but also to produce lower cost profiles and create fewer negative impacts of wage increases (because automation doesn’t get salary increases).

* "2017 Minimum Wage Increases: These 21 States are Paying Workers More"
** "Real Talk: The Potential Impact of a $15 Minimum Wage"

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