Small Business Benefits From a Minimum Wage Increase
The “Fight for $15” has led to minimum wage increases in many cities and states. These increases will disproportionately affect small businesses.
Research by Minneapolis Fed economists shows that a local minimum wage increase drives some small businesses out of business, and it may reduce total employment.
But it also increases hourly wages and reduces the need for workers to seek financial aid.
What is a Minimum Wage?
The minimum wage is the lowest amount you can legally pay an employee per hour of work. It is regulated by federal, state, and local laws, and may also differ by industry and scope of coverage (e.g., whether tips count toward the minimum wage or not).
Many people call for increasing the minimum wage because it would raise the earnings and family income of some low-wage workers and lift them out of poverty. On the other hand, some argue that raising the minimum wage would increase inflation, resulting in higher prices for goods and services.
The federal minimum wage is currently $7.25 an hour, and states have the option of setting their own wages above the federal minimum. When a state or local minimum wage change takes effect, employers must notify employees of the new rate and begin paying them that amount. Employers should also update any labor law posters in the workplace.
Why is a Minimum Wage Important?
In addition to lowering poverty rates, a minimum wage increase would boost consumer demand, which would benefit small businesses. It would also allow workers to spend more on healthy food, clothing, and other necessities.
Supporters argue that the primary purpose of a minimum wage is to improve workers’ welfare. They point out that employees who receive adequate compensation are better able to clothe themselves, feed their families, and provide for their children’s needs. They are also less likely to seek government assistance, which can distort the market for labor.
Some research suggests that a minimum wage increase can help narrow income inequality by eliminating the large gap between the top and bottom of the wage distribution. However, this finding is less robust than other research that shows a minimum wage increase does not lead to higher unemployment and has a negligible effect on productivity. Moreover, indexing the minimum wage can mitigate against long-term stagnation and protect against inflation.
How Does a Minimum Wage Increase Affect Employers?
Increasing the minimum wage increases the labor cost of goods and services. To cover this increased expense, firms raise prices on their products or services. This increase in prices is known as cost-push inflation.
Moreover, higher labor costs may cause some businesses to reduce hiring. This is particularly true for small business owners, as they have fewer resources to absorb higher wage costs.
Another potential negative effect is that raising the minimum wage may make it less attractive to take a low-level job. This could discourage younger, less-experienced workers from entering the workforce and gaining experience that could help them advance in their careers.
Proponents of increasing the minimum wage argue that this would reduce poverty in the country by enabling more families to survive off of their income. They also point to studies that have shown that recent increases in the minimum wage have had no discernible negative impact on employment rates. However, these studies are based on data from only a few cities, so it is difficult to extrapolate their results across the entire economy.
How Will a Minimum Wage Increase Affect Workers?
Increasing the minimum wage would raise the earnings and family income of low-wage workers who have jobs, lifting some families out of poverty. However, the same increase would cause some low-wage workers to lose their jobs and their families’ income to fall.
Moreover, the higher wages of those who remain employed would be diluted by price increases that businesses impose to cover their higher labor costs. These price increases would disproportionately impact households in the bottom half of the income distribution.
The vast majority of the approximately 16 million workers who earn hourly wages at or below the proposed new federal minimum wage are full-time adult workers, and most are women. Many states, and the District of Columbia, have a higher minimum wage than the federal level. For those who work in those states, a rise in the state minimum wage would have a larger impact than the national average. These workers could see their pay increase by an average of about $2.10.