DO NOT check this box if you are using a public computer. User IDs potentially containing sensitive information will not be saved.
Sign on to Online Banking
Things to Know about Labor Costs
by Mark Henricks
Whenever proposals to increase the legal minimum wage are being debated, it behooves business owners to understand the potential impact that a higher minimum wage would have on their businesses. The first thing to understand is the different types of labor costs.
Different Kinds of Labor Costs
Labor costs are commonly divided into four types: variable, fixed, direct and indirect. Variable labor costs can change depending on production levels. Hourly employees are usually variable costs. Employers can hire more hourly employees if needed, which will increase variable labor costs.
Fixed labor costs are costs that don't change when production levels change. Managers and supervisors are examples of fixed labor costs. These workers are normally paid salaries that don't change based on the number of hours they work.
Direct labor costs represent the cost of the labor spent on a particular product or service. For example, wages paid to a software developer for work on a new application are considered direct costs. Indirect labor costs can't be traced to a specific product. The salary earned by a bookkeeper is an example of a cost that isn't tied to any particular offering.
The Impact of Minimum Wage
Minimum wage increases most directly affect the lowest-paid workers. These workers usually represent direct and variable labor costs. For businesses that employ lots of low-paid workers, it's natural to expect direct and variable labor costs to rise following minimum wage hikes. And one of the arguments against raising the minimum wage is that, due to higher labor costs, businesses will reduce their workforces and increase unemployment.
However, research studies of the effects of minimum wage increases suggest that, while higher minimum wages do increase the earnings of employees, they don't necessarily increase a business's overall costs very much, or cause employment to decrease. The most likely reason for this finding is that when businesses pay higher wages, employee turnover declines. This reduces the costs of recruiting, hiring and training new workers, and promotes increased productivity.
What Can Businesses Do?
Businesses affected by minimum wage increases can use several methods to accommodate the legal requirements to pay workers more. These include reducing hours worked and reducing benefits. Some may cut costs by reducing training, while others may seek to boost productivity by investing in more training.
Businesses may also raise prices in order to help pay for the wage increases. Normally, this could restrict the markets for their products. However, one effect of increased wages is increased consumer spending, as workers have more money for food, rent, transportation, clothing, and luxuries. Rather than burdening local economies, raising the minimum wage and paying workers more can increase the revenues and profits of local businesses.
The federal minimum wage has been raised 22 times since it was first instituted in 1938, or about once every three years. Prior to 2016, it had not been raised since 2009 and, in inflation-adjusted dollars, the 2015 minimum wage of $7.25 was lower than it was in 1956. As of January 2016, there were 29 states plus the District of Columbia with a higher minimum wage than the federal minimum wage of $7.25.
Business owners need to be prepared to deal with an increase in minimum wage, as well as the possible effect on their labor costs and employment policies and practices when it comes.
About This Author
Mark Henricks is a freelance journalist covering business, entrepreneurship, technology, personal finance, health and fitness for leading publications.
Cash Flow Challenges
Insights on the top cash flow challenges business owners are facing today.
Browse All Articles »
Sign Up Now
Receive an email with featured articles and valuable insights for today’s business owners.
Start Your Cash Flow Conversation
Give us a call at 1-855-762-2365 or fill out our simple form and a PNC Business Banking representative will get in touch with you.
Request a Contact »
Optimize Your Business Cash Flow
Important Legal Disclosures and Information
PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). This article has been prepared for general information purposes by the author who is solely responsible for its contents. The opinions expressed in these articles are those of the author and do not necessarily reflect the opinions of PNC or any of its affiliates, directors, officers or employees. This article is not intended to provide legal, tax or accounting advice or to suggest that you engage in any specific transaction, including with respect to any securities of PNC, and does not purport to be comprehensive. Under no circumstances should any information contained in the presentation, the webinar or the materials presented be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy or should it be considered legal or tax advice. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc., will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission. Banking and lending products and services, bank deposit products, and Treasury Management products and services for healthcare providers and payers are provided by PNC Bank, National Association, a wholly owned subsidiary of PNC and Member FDIC. Lending and leasing products and services, including card services and merchant services, as well as certain other banking products and services, may require credit approval.
GET IN TOUCH
Banking on the Go
We have tools to help you bank when and where you want.Mobile Apps Directory »
Be part of our inclusive culture that strives for excellence and rewards talent.Visit PNC Careers »
The PNC Financial Services Group, Inc. All rights reserved.