What Minimum Wage Hikes Show about Employee Retention

U.S. $5 and $10 Bill

April 8, 2019

2019 will be a strong year for the minimum wage in America. Minimum wage policy—which requires employers to pay all workers at or above a particular threshold—is closely linked to discussions about the health of the United States frontline workforce.

A few weeks ago, Maryland approved a gradual increase in its state minimum wage from $10.10 to $15 per hour. Michigan recently affirmed a twenty-cent increase in its minimum wage, bumping the rate from $9.25 to $9.45 per hour. In total, twenty states will increase their minimum wages this year.

Most government officials and business leaders assume that pay and job satisfaction are one and the same. When employees are paid more, they are happier, more productive, and more satisfied overall… right?

Surprisingly, recent research shows that boosts in the minimum wage do not lead to such predictable results. When two researchers from a European think tank studied German workers after a 2015 minimum wage increase, they found a strong correlation between higher wages and the workers’ pay satisfaction. However, the relationship between wages and job satisfaction was much weaker. What can managers learn from this insight? 

minimum wage

Satisfaction extends beyond pay.

As research proves, different sets of factors cause satisfaction and dissatisfaction. In fact, pay cannot meaningfully increase satisfaction; it mostly prevents dissatisfaction. Psychologist Frederick Herzberg’s Two-Factor Theory helps to explain this phenomenon.

Herzberg’s work shows that job security, pay, and good working conditions do not cause satisfaction, yet dissatisfaction results when they are absent. Challenging work, responsibility, and feelings of achievement—as well as other factors related to sense of meaning—do not cause dissatisfaction when they are lacking, yet true satisfaction is impossible without them.

In other words, pay increases can’t simply gloss over a lack of meaning at work. Frontline employees need to meet their basic needs and their deeper longings for purpose. When managers include their frontline workers into the company’s purpose, they encourage meaningful participation in the company’s mission.

Nonwage factors play an important role in employee retention.

A Gallup poll indicates that 78% of the reasons that employees quit have nothing to do with wages. Many nonwage factorslack of opportunities for promotion, poor management, little recognition, and problems as simple as difficulties in traveling to work—prompt frontline employees to exit.

While adequate pay is important, nonwage factors are actually more important for employee retention. Rising employee turnover can partially be explained by a failure to address reasons for quitting that are independent from pay.

When frontline employees find more satisfaction at work, they exit at a far lower rate. Companies that decrease their employee turnover save between $2,000 and $7,000 per worker, resulting in boosted profits. Pay is not the only factor in retaining employees; to reap the benefits of higher employee retention, companies must also address nonwage factors.

Learn how Qlicket is helping companies increase employee retention.

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