Despite what you may have heard about the negative impact of raising the minimum wage on small businesses, a new report claims that all is not as it seems. Here’s what the report had to say.
Research Claims That Raising the Minimum Wage Benefits Small Businesses
In the U.S., the minimum wage is set at $7.25 per hour. It’s been a point of contention for many people for years, and while many states have their own minimum wages in place, proposals to hike the federal minimum are typically opposed by business owners.
Do Small Businesses Really Suffer?
Most business owners’ arguments hinge on independent businesses having to foot the bill, which could potentially put them out of business.
University Study Challenges Conventional Wisdom
However, new research from the University of Michigan and Carnegie Mellon University claims that increasing the minimum wage actually benefits smaller businesses rather than harms them.
Eye-Opening Study
Drawing on 10 years’ worth of data from U.S. tax returns, the study charted the revenue, employment rates, and profit of six states’ worth of small businesses.
Data from U.S. Tax Returns Reveals Surprising Results
They studied the tax returns of businesses and employees in states that had increased the minimum wage in 2014 and compared them with states that hadn’t.
A Closer Look
And, by all accounts, the research seems to debunk concerns that smaller businesses suffer in states that have raised the minimum wage.
How Minimum Wage Hikes Impact Small Businesses
According to the findings, most independent businesses can easily weather the extra costs of raising wages due to increased revenue and will typically have to make minimal cuts in employees.
The study notes, “We even observe small average increases in owner profits.”
The Most Vulnerable Industry
The report explains that restaurants are “the most acutely impacted industry” and that raising the minimum wage can cause some to close.
Profits on the Rise
However, it highlights that closures “are concentrated among the least productive small firms” while surviving restaurants see an increase in productivity, profit, and staff retention.
Closures vs. Survivors
The authors note, “The strong adverse impacts on some small firms help explain the opposition among some business owners.”
The Effect on Hiring
The study found that increasing the minimum wage reduces hiring as staff retention is high.
Workers don’t want to leave as they’re getting paid fairly, which also incentivizes them to be more productive, resulting in higher profits for businesses.
Productivity and Profitability
While wages will increase companies’ wage bills by 7% on average, revenues increase enough to offset this and create a small net profit increase.
Impact on Teenagers’ Employment
The report does show that businesses will be operating with “one fewer worker” as a result of wage hikes; however, it’s quick to note that “reduced hiring is almost entirely concentrated among teenagers in part-time jobs paying less than $4,000 per year.”
Positive News for Employees
Meanwhile, for employees, it’s good news. The report found that raising the minimum wage equals more money in the pockets of low-income and young workers – boosting their earnings by thousands of dollars each year.
Job Security for Workers
The study also shows that these workers are still just as likely to have jobs after the minimum wage increases.
Insights from Author Nirupama Rao
In a statement, author Nirupama Rao wrote, “For policymakers weighing tools for redistribution, our results show clearly that minimum wages do little harm to independent firms and even benefit some owners while meaningfully increasing both the earnings and employment of young and low-earning workers.”
Financing Gains and Losses
However, that came with a caveat: “Of course, these gains to workers and owners are financed by consumers, who appear fairly inelastic in their overall demand for the goods and services furnished by independent businesses affected by minimum wage policies.”
Risks in the Restaurant Sector
The report found that some businesses made losses and explained that restaurants are the most at-risk establishments for closures due to low-earning workers accounting for around 16% of variable costs, “as opposed to just 6% of production costs among retailers.”
Survival and Prosperity
However, it also discovered that “surviving owners see modestly higher average profits following the minimum wage increase as closures increase both margins and market shares among the most productive survivors.”
A Win-Win Situation for Both Owners and Workers
So, despite all the worries about raising the minimum wage hurting small businesses, it doesn’t seem to be all doom and gloom.
Many of them can manage the extra costs and even make more profit – good news for both owners and workers.
Featured Image Credit: Shutterstock / Paolo Paradiso.
The content of this article is for informational purposes only and does not constitute or replace professional advice.
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For transparency, this content was partly developed with AI assistance and carefully curated by an experienced editor to be informative and ensure accuracy.
