Cities or states are enacting higher minimum wage rates. Businesses should consider one or more of these four strategies: reduce labor usage, substitute equipment for labor, move to a lower-cost area, raise prices. These categories are not mutually exclusive.

A store near my office hires people to stand on the sidewalk holding signs that say “Mattress Sale!” There are sometimes three people standing on different corners working for the same store. At some wage rate, it no longer makes sense to have three people holding signs. In fact, at $15 an hour all of these jobs may go away. There’s sometimes a mental model held by politicians that the number of workers that a company needs is fixed. That’s not at all true, as evidenced by the sign holders. There’s a lot of elasticity in the demand for labor.

Even at today’s wage rates there is substantial substitution of technology for labor. In Oregon, where I live, the state minimum wage is $9.25, higher than the national minimum. Downtown parking garages no longer have human attendants. Instead, automated kiosks take payments. Similar examples abound across various businesses. This substitution of equipment for human labor takes time, but inevitably occurs. (See papers by Isaac Sorkin and Aaronson, French and Sorkin. In the latter paper, evidence shows that higher minimum wages push independent restaurants out of business, with more-automated chain restaurants filling the gap.)

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The third option for a company facing a high local minimum wage is to move to a lower-wage location. Los Angeles is the home to many apparel companies that have been paying entry-level wage rates less than the new $15 minimum wage. Adjacent cities with the lower state-wide minimum wage will attract these companies. This is the general case for manufacturing companies that pay low wages for at least some of their workers.

Why don’t the owners just absorb the higher costs? If the profit margins were high enough to do that, more competitors would already have entered the business, pushing prices down.

Raising prices shifts the burden of the minimum wage onto customers. Those customers may be high income or low income; there’s no general rule.

What should a business that uses low-wage workers do when its city or state mandates a large increase in the minimum wage?

First, look at how you are using your low-wage workers. Can some positions be eliminated, or hours reduced? Many companies have employment levels based on habit rather than careful evaluation of current needs.

Second, evaluate moving. If you could move a short distance and still serve your clients, this may be your best move.

Third, consider automation and outsourcing. Talk to equipment suppliers about their offerings. Consider things that you currently do in-house that could be outsourced.  For instance, a restaurant that makes its own sauces might consider purchasing them. In effect, they are substituting labor at a remote factory for local labor.

Even if you agree with me that a higher minimum wage doesn’t constitute good public policy, ranting and raving won’t help your business. Hard-headed calculation is what you need.