On Main Street, it’s time to prepare for the new state minimum wage hikes in 2024

More wage hikes are coming across U.S. states in 2024 and many Main Street businesses may feel the pinch. 

Not only are wages generally up from year-ago figures given the hot labor market, but minimum wage rates are rising in many states as a result of new laws. These can be a double-whammy to small businesses already dealing with inflationary pressures. At the same time, businesses know they need to pay more to attract top talent.

“It’s a very precarious situation that small businesses find themselves in,” said Steve Hall, vice president of economic development lending at the Local Initiatives Support Corporation, a community development financial institution. 

Here are some of the biggest wage hikes set to impact Main Street in the coming year:

California fast-food workers

Beginning on April 1, 2024, California’s minimum wage for the state’s 500,000 fast-food workers will increase to $20 per hour. By comparison, the average hourly wage for fast-food workers in 2022 was $16.21, according to a state release announcing the change, which cites a 2022 research brief from The Shift Project think tank.

Companies like McDonald’s and Chipotle have already said they are likely to raise prices to counteract the impact of the new law.

Chipotle chief financial officer, Jack Hartung, told analysts on a company earnings call that the chain will likely raise prices in California by a “mid-to-high single-digit” percentage. And McDonald’s chief executive Chris Kempczinski told analysts he couldn’t pinpoint the exact amount, but price hikes were likely to ensue.

This targeted food sector increase is separate from California’s hike to its minimum wage, which is rising to $16 in 2024 from $15.50, a 3.2% climb. Some cities and counties in California have higher local minimums.

Other states where minimum wages are going up in 2024 

Other states are raising the minimum wage, in part to attract workers to those areas of the country, Hall said.

Currently, 30 states and Washington, D.C., have minimum wages above the federal minimum wage of $7.25 per hour, according to the National Conference of State Legislatures. Even so, there’s a big disparity between minimum wage rates across the country, based on factors such as local cost of living.

Some states have set the bar significantly higher than the federal rate, and in many cases, levels are slated to rise in 2024 and beyond. Hawaii, for example, is set to raise its minimum wage to $14 in January, up 16.7% from the current $12 rate. Last year, the state set a plan for its minimum wage through 2028 when it will be $18 per hour. The state hiked its rate in 2022 for the first time since 2018 when the minimum wage rate was set at $10.10 per hour.

Nebraska’s rate is also going up in 2024 to $12 from $10.50, a 14.3% jump.

Maryland’s rate, for companies with 15 or more employees, will increase to $15 from $13.25, a 13% jump.

Delaware’s minimum wage is rising to $13.25 in 2024, up from its current level of $11.75, a 12.8% jump.

Wage growth cools, but gains above pre-pandemic levels  

Wage growth in the U.S. labor market has started to slow as the Federal Reserve’s interest rate increases cool off the economy. But wages, generally, are still increasing, which has an impact on small businesses’ ability to attract and retain top talent. Job-stayers reported a 5.7 percent year-over-year pay increase in October, according to ADP data, which analyzes the wages and salaries of nearly 10 million employees over a 12-month period. Pay growth for job-changers was 8.4 percent, ADP said.

In the most recent government nonfarm payroll report for October, average hourly earnings increased 0.2% for the month, less than the 0.3% forecast, while the 4.1% year-over-year gain was 0.1 percentage point above expectations. As growth has slowed somewhat, pay gains are still higher than before the pre-pandemic levels of roughly 2% to 3% growth, according to ADP.

Meanwhile, some of the largest companies in the nation continue to put pressure on the hiring competition, such as Bank of America, which last moth raised its minimum wage to $23 an hour and targets a minimum wage of $25 by 2025.

Where employers will look for the money

Employers want to treat their workers fairly, but they also need to figure out where the money to increase wages is coming from, said Molly Day, vice president of public affairs at the National Small Business Association. Some may pare back on benefits, hire fewer workers or like the big fast-food companies, raise prices for consumers. But those moves can have implications on the broader business. “It’s a really hard position that small businesses are in, especially when it’s such a big jump,” Day said. 

The impact could be even higher for low profit-margin businesses. Instead of hiring three high school students for the summer, maybe they’ll decide to hire one or two. “I think that’s a choice that many small business owners will have to make,” Day said.

Indeed, business owners will have to weigh the pros and cons of efforts they can take to manage the wage increases. 

“The last thing we want to do is make changes in the ways we do business that’s going to negatively affect our employees and make them feel not valued,” said Zachary Davis, co-founder and chief executive at The Glass Jar, a farm-to-table restaurant group in Santa Cruz, Calif.

However, customers don’t like when you raise prices, so communicating with them about the reason for the increase is critical. “We’re not out to try to take more from our customers than they can afford, but we have to adapt to accommodate wage increases,” Davis said. 

The long-term implications of higher pay

Certainly, employees value competitive wages. Twenty-four percent of respondents said having competitive wages was the most important factor in deciding where to work, according to a recent survey from small business HR vendor Homebase.

Higher wages generally translate into happier employees, less turnover and higher productivity, said Leo Carr, executive president of The Elite Group, a professional development and training organization in Southfield, Mich.

However, small businesses still have to consider what wage growth over time could do to the bottom line. It may be sustainable now, but “down the road it may not be,” Carr said. 

Even so, many business owners are resigned to the idea of paying more for workers, given that they can’t otherwise find good employees. “They’ve given up on the idea that paying more for a workforce is a bad thing,” Hall said. “Now they’re just saying, ‘Give me a workforce.'”