Question

How does factoring in minimum wage costs get added when wages have not necessarily been paid out yet at the new higher rate? For instance, if minimum wage is set to go up in the next few months and companies know of this increase in labor cost, when do they start raising prices or determining the best way to offset these added costs?

My assumption would be to raise product costs and cut employees beforehand, yet it seems many businesses tend to not raise costs or lay off employees until the new law/wage has come into effect. What do you guys think and what's the most efficient way to go about this as well?

Answer 1

There are certain other factors that needs to be taken take into consideration. First, what is the demand for the product in the market and what is the market-share of the organization.

If there is a reasonable demand for the product in the market, the price of the product can be raised as per the market conditions i.e the price can be raised when the new law or wage comes into effect. However, where the demand for the product is highly dependent on prices, it is suggested not to increase the prices at once. Rather, if the organization can anticipate the upward trend in the labor costs due to minimum wages, it may chose to raise the price of the product beforehand slightly and focus on cost-cutting measures in other areas. It is also advised to reduce the work-force based on the marketability of the product.