Despite long-standing concerns that increasing the minimum wage could hurt small businesses, a new report challenges that assumption. Here’s what the research reveals.
A Familiar Argument, A New Perspective
The U.S. federal minimum wage currently sits at $7.25 per hour. While many states have implemented their own higher wage levels, proposals to raise the federal rate are typically met with strong opposition—especially from small business owners. The common argument is that independent businesses will struggle to afford the increased labour costs, potentially pushing them to close.
But new research from the University of Michigan and Carnegie Mellon University suggests otherwise. The study, which analysed ten years of tax return data, found that raising the minimum wage often benefits small businesses instead of harming them.
What the Data Says
Researchers examined business performance in states that increased the minimum wage in 2014, comparing them with states that did not. They tracked changes in revenue, employment, and profit, drawing from tax data across a six-state sample.
According to the findings, most independent businesses are able to absorb the increased costs. Higher wages often lead to improved staff retention and productivity, meaning fewer resources are spent on recruitment and training. The study even noted “small average increases in owner profits.”
Impact on Vulnerable Sectors
The report did find that some industries feel the impact more than others—restaurants, in particular, were identified as the most vulnerable. However, the closures were mostly concentrated among the least productive firms. Surviving businesses, by contrast, saw gains in productivity, profits, and team stability.
The researchers acknowledged that “strong adverse impacts on some small firms help explain the opposition among some business owners,” but added that reduced hiring was largely limited to part-time teenage roles earning under $4,000 per year. Overall employment levels remained stable.
Revenue Gains Offset Cost Increases
The financial picture is nuanced: while businesses faced an average 7% rise in their wage bills, revenues generally increased enough to offset these costs and even generate modest profit growth. For workers—especially younger and lower-income employees—the impact was more pronounced, with annual earnings rising by thousands of dollars.
Long-Term Benefits for Workers and Owners
Lead author Nirupama Rao explained: “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.”
She added, however, that the gains 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.”
Restaurants remain the most at-risk group, as low-paid labour accounts for around 16% of their variable costs—compared to just 6% for retailers. Still, the study concluded 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.”
In short, while wage hikes may create pressure for some businesses, they appear to build stronger, more resilient firms and offer real financial benefits to workers.
Featured Image Credit: Shutterstock / Paolo Paradiso.
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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.
