Raising Minimum Wage Abroad: Four Impacts & Ideas for Mid-Sized Firms Looking to Expand Globally

Raising minimum wage isn't just a trend on the federal and state levels here in the United States. It's also a global trend, one that will need to be factored into any decision you make to expand internationally.

Rising Minimum Wages Abroad Could Impact Middle Market Firms

Trends in Asia

Even in China, the most popular site for low-wage production overseas, a rising minimum wage is pushing up labor and production costs as the central and regional Chinese governments seek to increase the average incomes of workers. It's not just labor and production costs that have been pushed higher by the minimum wage trend; overall inflation in China has also followed suit, and as a result, many international companies producing in China have been looking to lower-cost nations such as Vietnam and Indonesia for their production needs.

China's increasing minimum wage may make the global production leader less competitive and less attractive for foreign companies, compared to more affordable Asian neighbors. According to a recent report by global consultancy company Accenture called Wage Increases in China, regional governments in China "have raised the minimum wage level by an average of 20 percent." This trend in China will doubtless continue as its government focuses more on raising domestic living standards and less on helping foreign companies keep their wages down. Middle market firms should take note.

Trends in Europe

An upcoming vote in Switzerland has put the spotlight on the raising minimum wage trend in Europe, as well. On May 18, voters will be deciding on a national referendum to make Switzerland's minimum wage a world-leading $25 per hour, which could make Switzerland prohibitively expensive for the small and middle market companies that employ two-thirds of that nation's workers. The Swiss referendum, backed by the nation's trade unions, could join the recent minimum wage hike in the United Kingdom, while German Prime Minister Angela Merkel is pushing for an increase in Germany. The minimum wage in France is already higher than the proposed increase backed by President Obama in the United States.

The flip side of the aforementioned trend in Switzerland is that, as a proposed increase of the minimum wage is discussed, a country that already had above-average pay to begin with is watching its manufacturing sector gather steam. The high manufacturing wages of the Swiss aren't prohibiting growth in that sector, showing that there isn't necessarily a strict correlation between labor costs and competitiveness.

Four Impacts & Ideas for Mid-Sized Firms

As minimum wages increase across the globe, here are four potential impacts on middle market firms like yours:

  1. Rising labor costs in international markets, especially for hiring unskilled workers
  2. Higher costs and prices in your international supply chains
  3. The need to increase your prices or reduce your margins to reflect these higher production and supply chain costs
  4. The ripple effects of minimum wage hikes may foster more global inflation and lead to an inflationary cycle that could damage global economic recovery

What should your middle market company be considering in order to achieve the highest value from overseas activity? Here are four ideas:

  1. Reconsider investing in automation as labor costs rise, allowing you to be more productive with fewer workers
  2. Renegotiate relationships with suppliers in an effort to stabilize costs in your supply chain
  3. Keep rising minimum wages in mind as you plan to move production or sourcing relationships overseas
  4. Focus on overall operational efficiency to make sure that you are working as efficiently as possible in all your markets

The takeaway that midmarket firms should get out of these trends is that cost isn't the sole driving factor behind decision-making when it comes to expanding overseas. Rising minimum wages aren't going to go away; in fact, they will continue to rise all over the globe. Therefore, the savviest of midmarket CEOs will not solely focus on chasing low wages; they should instead be keying in on raising the value of whatever international wages that they're paying.

What other actions can middle market firms take to adapt to minimum wage hikes around the globe? Let us know what you think by commenting below.

Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+.