For the more than 6 million small businesses nationwide, employee turnover can be a brutal expense.
In fact, nearly 1 in 3 (32%) employees will no longer be at their current employer one year from now. For a team of 20, where each person earns $50,000, that turnover rate can cost a business more than $100,000 a year. That's why reducing turnover is essential for keeping costs down as it relates to hiring, onboarding and training employees.
In a recent analysis of why employees leave small businesses, the research team at payroll, HR and benefits company Gusto found a strong correlation between hourly wage thresholds and the rate of turnover.
According to the data from tens of thousands of small business employers who work with Gusto across the U.S., employees earning $7.25/hour (the current federal minimum wage) have a 70% chance of leaving within a year, more than double the average turnover rate of 32%.
This finding comes alongside the recent passage of the Raise the Wage Act in the U.S. House of Representatives. The bill proposes a gradual increase to the federal minimum wage from $7.25/hour to $15/hour by 2025. The Senate hasn't considered the bill at this point, yetnearly all 2020 Democratic presidential candidates support the legislation.
Gusto's data indicates that at $15/hour, turnover rates drop significantly from 70% (at the current federal minimum wage) down to 41%.
The economics of the minimum wage are complex.
Results from Seattle's minimum wage ordinance mirror Gusto's findings — employee turnover declined as a result of the city's minimum wage increase. This same research also found a significant reduction in hours worked by employees, suggesting that employees worked fewer hours because they could earn more in less time and by paying for fewer total hours worked employers could make up for the added costs.
But how much you pay an employee is not the only thing that contributes to turnover risk. As pay increases, the returns to each additional dollar diminish. Doubling an employee's hourly rate from $25/hour to $50/hour still reduces turnover, but by a smaller margin — from 31% to 24%.