Many employers have been raising wages substantially to maintain operations in today’s tight labor market. That’s most evident in the leisure and hospitality sector, where average hourly wages rose 12% for the year ending October 2021.

For many organizations, getting by with paying minimum wage is generally a distant memory. That’s particularly true where the state’s minimum wage is the same rate — $7.25 — as the federal rate in place since 2009. It can be a different story in other states with minimums as high as double the federal rate. Even a slight minimum wage increase can have significant financial consequences for a business or not-for-profit organization.

State Variations

Minimum wage rates vary from state to state.  Many states will increase their minimum wage rates starting on January 1, 2022.

When reviewing state rates, be sure to get the details, including different rates for tipped employees, from your state’s labor department. Also, keep in mind that many localities have higher minimum wages than the states they’re in. For example, starting in January 2022, the minimum wage in Maryland will be $12.50 per hour for employers with 15 or more employers and $12.20 per hour for employers with 14 or fewer employees. But it will be as high as $15 per hour for large employers in Maryland’s expensive Montgomery County. Also, some states set lower minimums for employers below a specified size threshold. For example, in Montgomery County, Maryland, the general minimum rate is $14 for employers with 11 to 50 employees and $13.50 for employers with 10 or fewer workers.

California has many localities with higher minimum wage rates than the 2022 state rate of $14 for employers with fewer than 26 employees and $15 for larger employers. For example, in 2022, Palo Alto’s minimum per-hour wage will be $16.45, Mountain View’s will be $17.10, Redwood City’s will be $16.20, and Santa Clara’s will be $16.40. (These are just a handful of the California local rates higher than the state rate.)

Meanwhile, Seattle will have one of the highest minimum wage rates in the country in 2022. The state minimum wage will be $14.49 per hour. But for large Seattle employers (with 501 or more employees), it will increase to $17.27 per hour. For small Seattle employers (with 500 or fewer employees), the 2022 minimum wage will be $15.75 per hour for employers who pay $1.52 per hour toward the employee’s medical benefits and/or for workers who earn at least $1.52 per hour in tips.

Cost of Living Considerations

In many states, minimum wage levels are determined with consideration to what a local “living wage” might be. For those that do, higher inflation rates may give employers in those states a preview of future minimum wage levels.

For such employers, tools exist to help them handle what it takes for people to achieve a basic standard of living in their area. One is the “living wage calculator” created in 2004 by Amy Glasmeier, Professor of Economic Geography at the Massachusetts Institute of Technology. According to MIT, the tool is “a market-based approach that draws upon geographically specific expenditure data related to a family’s likely minimum food, childcare, health insurance, housing, transportation, and other necessities cost.”

Comparisons between cities reveal some stark, if not surprising, contrasts. For example, the tool suggests that a living hourly wage for a single adult in San Francisco is $28, but only $13.46 in Topeka, Kansas.

Jump for Federal Contractors

The minimum wage rate for employees working under federal government contracts has increased. That’s because the executive branch can make those changes without the necessity of Congressional approval. There are roughly 3.7 million federal contractors, according to one estimate.

Specifically, employees performing work on or in connection with covered contracts must be paid at least $11.25 per hour as of January 1, 2022. That represents a 2.7% increase over the prior $10.95 level. However, the hourly rate will be substantially higher — $15 — for federal contracts entered into on or after January 30, 2022, or extended according to a contract option, according to the U.S. Department of Labor (DOL).

Analyze All Pieces of the Puzzle

The recent uptick in inflation may cause some employers to think beyond legally required minimum wages, even without regard to labor market conditions. In November, the Consumer Price Index was 6.8% higher than November 2020, with key drivers being gasoline, food, and used cars.

Understanding labor cost dynamics — and not just at the bottom end of the wage scale — is one of many requirements of running a successful business. Your financial advisor can assist you in analyzing all the major pieces of your profitability puzzle.