Will a Minimum Wage Increase Affect Small Businesses?
A growing number of states and cities are raising their minimum wage. This trend is likely to continue as labor groups set their sights on $15 an hour as the new norm.
The effect on employment of increases in the minimum wage has been the subject of much research. Studies generally find that employment is responsive to changes in the minimum wage, but the magnitude of any response is uncertain.
The bump in purchasing power from a minimum wage increase can help families cover the cost of necessities such as food and rent. A number of studies have found that low-income households spend a larger percentage of their incomes on these goods and services.
Some studies show that a minimum wage increase benefits children and other family members, as well as the community. Others suggest that higher wages can also reduce the need for government transfer payments to poor and low-income individuals, which can add up to substantial savings for taxpayers.
A number of careful economic studies have shown that recent increases in the minimum wage have had no discernible negative effect on employment. In addition, many businesses adjust noncash aspects of their jobs to offset higher labor costs. For example, firms may buy cheaper office equipment or replace workers with technology. These changes can affect all employees, but they generally do not increase the unemployment rate for lower-wage workers.
Many small family and midsize businesses will find it challenging to absorb the extra costs of raising minimum wages. Those who run retail stores and restaurants will find that customers will likely choose to take their business elsewhere, leaving them with razor-thin profits and the need to cut hours for workers or let them go.
Employers may also be forced to give raises to employees who are already making above the minimum wage, adding more labor costs. The extra money they earn, however, could encourage them to work harder and reduce employee turnover and absenteeism.
Another potential disadvantage is that increasing the minimum wage might discourage teenagers and other inexperienced workers from obtaining jobs. Starting a job helps young people build work experience, develop fundamental skills and gain the financial stability they need to move forward in life. This would be a major blow to younger Americans and their families. Fortunately, there are options to help them get ahead, such as a high-yield bank account from SoFi that pays competitive APY and offers no monthly fees.
Effects on Employment
Ultimately, the answer depends on what sorts of workers are affected. Some states have a higher percentage of people working at or below the minimum wage than others. If all those workers are affected by a minimum wage increase, then there will be a loss of jobs.
However, if most workers in the affected industry are not paid directly by the firm that hires them, then those firms will not need to cut staffing levels. Firms can absorb the impact of a minimum wage increase in other ways, such as raising prices, increasing productivity, or cutting non-wage costs.
A notable exception to this general rule is the study by Card and Krueger that found that a big jump in the minimum wage reduces employment among teenagers and low-skilled continuous workers more generally. Other recent studies using a variety of methodologies do not find such effects. Nonetheless, most researchers conclude that at moderate levels, minimum wages do have some effect on employment.
Effects on the Economy
Traditional economic theory predicts that raising the minimum wage will increase labor costs for employers, causing them to reduce employment. However, recent research has challenged this logic.
Workers who are directly affected by a minimum wage increase will experience higher earnings. Spillover effects (increasing wages for workers above the minimum wage) are also observed.
In addition to increasing family incomes, workers who receive the benefits of a minimum wage increase may see reduced use of public assistance programs such as food stamps, child care subsidies, and housing vouchers. Row 1 of Table 1 combines estimates from Cooper (2016) and EPI (2021) to estimate the magnitude of these reduced government spending benefits.
Rising worker wages will help to boost overall consumer spending, which can have a positive impact on the economy. Ideally, a minimum wage would be adjusted regularly to reflect the growth in labor productivity. In this way, workers can enjoy the benefits of prosperity without having to endure long spells of unemployment.