DEALING WITH THE RISE IN LABOR COSTS

The federal minimum wage is due to rise again this July to $7.25 – just 12 months after the July 2008 rise to $6.55. In July 2007, the federal minimum rose for the first time in a decade. Federal minimum wage and overtime laws apply to all American workers, except for a few very small groups: employees of religious, educational or non-profit organizations, workers in very small firms, etc.

How does a business plan for inevitable increases in labor costs? While an increase in the minimum wage raises costs, the recession, on the other hand, will increasingly force consumers to pinch pennies more tightly, thereby raising pressure on businesses to deal with buyers' insisting on bargains.

In a report last year, the Brookings Institution maintained that businesses' profits will be squeezed because employers will be unable to pass on all of their higher employment costs to customers in a tighter economy. The report indicated that a number of manufacturers were instituting a variety of incentive programs to boost productivity, according to the report. The emphasis on rewarding labor for more efficient performance minimizes the impact of an increase in overall labor costs.

In the '30s individual piecework was the standard way to motivate employees to increase their productivity and cut unit costs. This method is still used in garment manufacturing and in some soft goods industries. The rise of assembly line manufacturing diminished individual piecework, because the speed of the line determines output. The '50s saw the creation of other incentive plans. Profit sharing has become popular – but it is a deferred reward, rather than a plant-floor motivator to punch out more widgets now.

According to the Bureau of Labor Statistics, gainsharing has become widespread in manufacturing over the last two decades. Gainsharing is a group incentive plan – a pay-for-performance program – that rewards labor for higher productivity and benefits the company by cutting per-unit costs to meet and increase in labor rates.

About 18 percent of manufacturing companies today use some variety of this incentive system, according to the BLS. In 2007, around 1.9 percent of all hourly workers received less than the federal minimum nationally, because they were in exempt categories, estimates the BLS. Prior to the national increase that year, the BLS reported that 31 states and the District of Columbia had minimum wages that exceeded the federal level of $5.15.

Certain industries account for the majority of low-paying jobs, i.e. food manufacturing, distribution, retailing and fast-food outlets. The Census Bureau says that, for the country as a whole, workers who earn near the minimum wage are likely to be female, young and Hispanic – and many lack a high school diploma.

The majority of low-wage workers live and work in metropolitan areas rather than in rural communities. Many of these workers are employed in a wide variety of manufacturing industries in which part of the work is sorting and assembling smaller pieces. These workers are usually paid the federal minimum to start. A rise in the minimum wage rate tends to boost pay in these categories and also the pay differentials for semi-skilled labor.

With the coming rise in the minimum in July, we can expect to see the growing use of gainsharing, particularly among small manufacturers whose executives are most pressed by the need to cut costs through heightening productivity. That form of system creates a plant-wide incentive that addresses the employees' basic drive for money, while at the same time, boosting company profits.

In the light of rising labor costs, manufacturers would benefit from considering this highly effective incentive strategy.

A. A. Imberman, PhD is a retired academic that is currently chairman of the management consulting firm Imberman & DeForest, Inc., 990 Grove St., Evanston, IL 60201-4370, 847-733-0071, Fax: 847-733-0074, www.imbdef.com.