Should firms volunteer to pay living wages instead of mandated minimum wages? A 2013 Harvard Business Review article, Does Money Really Affect Motivation? A Review of the Research, concluded “We all need to pay our bills and provide for our families — but once these basic needs are covered the psychological benefits of money are questionable.” The report continued: “Intrinsic motivation is a stronger predictor of job performance than extrinsic motivation” that money sometimes provides. Later, a 2015 study by the Peterson Institute for International Economics stated that higher wages for low-income workers lead to higher productivity. 

Evolution of Minimum Wages

The first attempt at a minimum wage in 1831 in Lyon, France, intended as a wage to provide funds for the worker to live, failed. Later in 1894, New Zealand became the first government in the world to set minimum wages by passing the Industrial Conciliation and Arbitration Act. That law banned strikes and lockouts. In 1898, Samuel Gompers, founding president of the American Federation of Labor, published A Minimum Living Wage, an article advocating a legal threshold for wages enough for workers to live. No legislation existed in the USA until 1912 Massachusetts passed the first minimum wage law. Soon, other states followed soon.

The minimum wage became a political item, not indexed to inflation, and politicians played politics with it. Today, in many parts of North America it is inadequate. 

A 2007 study by David Neumark and William Wascher found “minimum wage increases more closely resemble income redistribution among low‐income families than income redistribution from high‐to low‐income families.”

Living Wages Foundation of the UK

The Living Wages Foundation of the UK (LWF) in 2015 presented case studies of six member firms including Barclays PLC, KPMG LLP UK, and Enhance Office Cleaning Ltd to review evidence of the business case for the Living Wage in the UK. Individual firms’ findings included lower staff turnover, greater worker involvement, higher productivity, and ability to recruit better calibre workers. Barclay’s employee relations director commented:  

Not only is paying people who work on our behalf a wage that supports a decent standard of living a responsible thing to do, there are also clear business, societal and economic benefits to doing so. The perceived costs of paying this higher wage are, in our experience, outweighed by increased productivity and morale and reduced recruitment costs. Paying a higher wage encourages workers to stay and explore different career opportunities. We have also heard first hand from our contracted staff how receiving the Living Wage improves their quality of life both at work and home.

Michael Kelly of KPMG said:

If you start from the premise that the whole change management programme is just a pay differential program you are at a loss even before you have got going. …[organisations should] treat going Living Wage as a change management programme; phase it over a reasonable term 1 or 2 years. … Never underestimate the amount of positive engagement you generate from employees already above the Living Wage who will never see any change because of it.

One key high level conclusion from these case studies is that introducing a Living Wage has start-up costs but over the long run, benefits out weigh them. By 2015, 1,300 employers with 80,000 workers volunteered to pay the Foundation’s Living Wage.

What is the UK’s definition of a Living Wage?  The government does not compute its ‘national Living Wage’ according to what employees and their families need to live. Instead, they base it on a target to reach 66% of median earnings by 2024. Under current forecasts this means a rise to £10.50 (~ USD 13.60) per hour by 2024. 

Living Wages Versus Minimum Wages

Should today’s business leaders embrace Living Wages over minimum wages because evidence shows Living Wages fuel a healthy, productive workforce? And because it is the fair, humane thing to do? Once workers’ wages meet their basic needs, the probability increases they become motivated intrinsically. Managers do not contrive intrinsic motivation. Each person develops it based on factors specific to that person. 

To be sure, money is an important component of the motivation equation. Behavioral Economist and Duke University professor Dan Ariely puts it this way: 

“Motivation is a forest full of twisting trees, unexplored rivers, threatening insects, weird plants, and colorful birds …[the forest] has many elements we think matter but in fact don’t… it’s full of unusual details that we ignore completely or don’t think matter, but turn out to be particularly important.”

Motivation and Wages

Let’s look at a few differences between extrinsic and intrinsic motivation:

The Living Wage applies to entry-level jobs. In the UK this includes cleaning, catering, and security workers, plus small contractors. A key question is how to design these jobs to remove drudgery. One size doesn’t fit all. And each person is distinct. Still, removing the anxiety of living pay-check-to-pay-check will help workers focus on their jobs. The table below shows the gap in wages needed to rent an apartment in Toronto, Ontario, versus the minimum wage in October 2018.  

With COVID-19 challenges, conditions worsened: people are more insecure and need emotional and financial help. Firms hate uncertainty. The upcoming elections in the USA presents added anxiety. And the Commerce Department’s report on July 30 that US gross domestic product plummeted at a record 33% annualized rate in the first quarter, is cause for concern. These conditions do not augur well for the economy and business. How does an entry level person with a job concentrate on that job in these situations?

Should Businesses Volunteer to Pay Living Wages

Despite these adverse conditions, businesses must pay workers fair wages and stop over-paying proven incompetent CEOs? As the UK firms in the Living Wage Foundation noted, companies must not regard a Living Wage only as an extra cost, but as a fundamental change in doing business. It’s part of the cost of doing business that firms will recoup in the long-term. 

A Living Wage will challenge small businesses. These firms must plan and adjust traditional approaches to pay this wage. It will take time, but they should commit to do so because it is the right thing to do. They should not pass on the extra cost in higher prices without examining business models, supply chains, and strategies. Owners and workers must become creative in delivering product and services to customers. 

COVID-19 highlights that workers need help, now and later, to get their basics. Today, firms identified several entry-level workers as essential. Companies need them as much now as they will after the pandemic; they must pay fair wages.

These days, we talk about minimum and living wages in isolation and focus on their costs, disregarding benefits and the need to do what’s right. Employees working for minimum wages cannot eat healthy meals or find suitable accommodation; thus, they will perform below par. Let’s not forget the original purpose of the minimum wage was to allow a worker to exist on that income.

Steps to Improve Entry Level Workers’ Productivity

That said, here are actions we can take in our firms to improve conditions for entry-level workers to improve productivity:

1. Take money off the table by discussing with employees a plan to pay a livable wage. Be realistic and acknowledge the initial cost of paying above the minimum wage might hurt the firm. Talk to employees and tell them your plan to work towards paying above the minimum wage in a specific timeframe. 
2. Work with the employee to understand her situation and learn about personal challenges and issues with the job.
3. Provide the goal for the job, but let the employee design solutions to reach that goal. Create a safe environment, physical and emotional, for the employee to give her best. Assure the employee of your confidence in her ability to do a splendid job and provide needed support and training along the way.
4. Give continuing feedback and listen to the employee’s ideas about changes to improve the work. Tell the employee how she fits in the bigger picture.
5. Encourage, encourage, encourage! Ask how she is doing and how you can help. Ask how you are doing, and how you affect her progress. Check to ensure conditions remain safe and she can talk to you.
6. Acknowledge potential, suggest training, coaching, as needed. When she doesn’t meet expectations, remember she feels awful, so build her up and use the incident as a learning opportunity.
7. Review goals and plans often and listen to the employee’s ideas to achieve them when they differ from yours.
8. Give the employee responsible authority to decide minor issues; escalate the size. However, understand this means she will make mistakes. Treat them as learning opportunities.

Conclusions

Five developed countries (Sweden, Iceland, Norway, Denmark, and Switzerland) have no government-set minimum or living wages’ laws. They have low unemployment and robust unions who set industry minimum wages. North American union leaders choose political sides, act like politicians, and don’t look at long-term interests of their members. The decay in the North American auto industry is an excellent case study of results of irresponsible unions and management behaviors — both sides share blame. Unionization isn’t the answer in North America. Instead, owners and managers:

1. BE ACCOUNTABLE: Accept responsibility for decisions and consequences, good and bad.
2. BE OPEN: Communicate the business’ goals and plans. Involve employees in their development, and explain decisions. 
3. ENCOURAGE EMPLOYEE FEEDBACK:  Have interactive communication like suggestion boxes. Hold information sharing meetings. Give employees an opportunity to speak often.
4. BE FAIR: Provide a safe, secure, and fair workplace.
5. BE TRUSTWORTHY: Let your yes be yes and no be no. Employees should know  they can trust your word.
6. BE PREDICTABLE: Be uncompromising in adhering to your values. Practice them and expect others to do so always. They apply to everyone! 
7. BE OPEN TO PROFIT SHARING: At the right time, which will vary, consider expanding compensation and provide the option for long-term employees to share in the business’ profits. 

Discussions about paying a Living Wage won’t go away. It is complex, but business leaders in North America must address it. Fair wages are part of the cost of doing business. Leaders must prioritize it over buying back shares and spending unreasonable sums on CEO’s bonuses. In fact, there is an inverse correlation between CEOs pay and company performance.

A Living Wage is subjective and will vary from province to province, state to state, and will challenge small businesses. It is not a political issue. It’s not a conservative, liberal, left or right matter; but a real practical matter of providing a modest wage that enables individuals to move beyond pay-check-to-pay-check to provide for themselves and their families.  

Owners and leaders in firms must ask themselves whether today’s minimum wages are enough for entry level workers to invest their emotions in a business. Owners and leaders of small businesses must treat employees with respect, provide a safe working environment, and seek workers’ inputs to improve their businesses. 

A small sample of young adults told me their experiences with small business owners were always negative. They said owners did not care to hear their inputs to improve the business. These firms had high turnover and instead of trying to understand why, blamed workers, though, often a toxic environment was the primary cause. 

Small business owners must examine their attitudes, approaches, business models, supply chains, look at creative ways to do business, and work with employees to enact changes. Paying a Living Wage is inevitable. Firms must work out wrinkles and challenges now. The question isn’t if, but when will governments impose it. When governments act, they will create such a mess that everyone will be worse off.

© 2020 Michel A. Bell

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