August 27, 2014

Raising Minimum Wage: Next Proposal to Threaten Small Businesses

raising the minimum wage

Raising the minimum wage is shaping up to be the latest in a string of President Obama’s proposals that have rankled small business. The White House recently indicated it would support Illinois Democrat Dick Durbin’s proposal to raise the minimum wage to $10.10 per hour and index it for inflation, The Hill reported.

Once again small business owners, particularly those in low margin retail and service businesses, are readying for a political battle over how they compensate employees.

Raising the Minimum Wage

Boosting the minimum wage will raise the cost of employing low-skilled workers. In highly competitive industries where passing the cost on to customers in the form of higher prices is not an option, small business owners are likely to shed workers to preserve profits.

As President Obama’s economic advisors can explain to him, business owners pay their employees according to the economic value those employees generate. If the government sets wages higher than what employees are worth, then the businesses will lay off the unproductive ones – those who cannot produce value that exceeds the wage they are getting.

Economists estimate that the proposed 39 percent increase in the minimum wage would cut employment of low-skilled workers by between 4 to 8 percent. In some industries, like leisure and hospitality where a higher fraction of workers are paid the minimum wage, employment would decline even more.

Young People May Suffer the Most

Young people likely would suffer the most from an increase the minimum wage because they more likely to work in jobs that pay at or below the minimum wage. Therefore, they are the ones most likely to face layoffs if the minimum wage makes their employment no longer economically productive.

Estimates by economist Joseph Sabia of the University of Georgia suggests that the 39 percent increase in the minimum wage would lead to a whopping 20 to 36 percent drop in the number of teens working at small businesses.

The disappearance of these jobs will have long term effects on young people. The decline in the number of young workers means many of them won’t be developing skills and generating contacts from their first jobs. And that’s likely to have negative effects on their long term career prospects.

A higher minimum wage also induces some teenagers to drop out of school, setting them up for a lifetime of poor earnings. University of California at Irvine economist David Neumark and Federal Reserve economist William Wascher found that the nearly 40 percent increase in the minimum wage being proposed would be expected to lower high school enrollment by as much as 8 percent.

It’s a cruel irony in that boosting the minimum wage will mean more impoverished people. As Federal Reserve Bank of Cleveland economist Mark Schweitzer and University of California economist David Neumark have found, businesses often cut poor workers first when an increase in the minimum wage makes hiring as many workers uneconomical. Because those workers often have the least long term job potential. As a result, boosting the minimum wage means poor adults being passed over for jobs and ending up stuck in poverty.

At a time when the Democrats are a minority in the House of Representatives, increasing the minimum wage would require Republicans to go along. Given the GOP’s economic philosophy, however, that’s not likely to happen.

Coffee Shop Employee Photo via Shutterstock

11 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

11 Reactions

  1. Thanks for the info, Scott.

    This is a tough issue.

    On a human level, I’d like to see the minimum wage go up-a lot.

    If workers can’t afford to live on the wages they’re getting, the government will have to subsidize them. How does that help our economy? It helps Wal-Mart, and that’s never good.

    But, if workers are getting paid more, they’ll spend more, right?

    Wouldn’t that help our economy grow? Wouldn’t that create more jobs?

    The Franchise King®

    • Hi Joel,

      I think this is a tough tough issue!

      Most business owners I know would prefer to do as much as possible for their employees, because they know how critical their employees are to the business. In fact, in a lot of businesses the business owner sacrifices in order to do more for employees. (I’m talking small business owners here, not corporate executives — because I don’t see a whole lot of sacrificing going on like that in large corporations.)

      That said, some of it may be a question of needing to hire entry level people at lower amounts … with the intention of increasing their pay as they remain and add value to the business. And some businesses may have no choice but to pay at a certain level if they want to stay in business.

      - Anita

    • I personally think raising wages won’t do any good to the employees and the economy.

      I agree with you – chances are, when workers are paid more, they’ll spend more. With that being said, what I believe what people need is proper financial education: Knowing what to do with their money, whether it’s $10, $100 or $1 million.

  2. This assumes, of course, that workers who suddenly see a raise don’t start spending that money, giving businesses a boost. That’s why employment has historically not changed much, if at all, in places that have increased their minimum wage.

  3. Scott makes some great points here. Fewer jobs means more competition for the remaining jobs. The least qualified people are the ones who lose out. Those are usually the least qualified/experienced workers, which are most likely the same people that the law was intended to help out. But now they can’t get a job at all. Somewhat of a catch-22 for policy makers.

  4. Boosting the minimum wage will raise the cost of employing low-skilled workers. Not many companies can afford this and may have to lay off workers. There has to be a balance between the two – of profitability and paying the minimum wages.

  5. Scott,

    Do you think that the disadvantages of raising the minimum wage Would be offset by having two such wages; one for teenagers and people entering the workforce for the first time and the second one for all the rest of us?

  6. While raising may seem like it will benefit workers on the surface, it can actually hurt them more? Why? Everything is interconnected. This means that if small businesses cannot keep up with higher wages, they will eventually need to take out some people which lowers the employment rate.

  7. Shed workers to preserve profit? It’s pretty obvious you have zero understanding of how a business grows or what the value of your workers actually means to that growth. As a small business you start at with one employee. You. As your company grows, it becomes more profitable. Not because you are doing more, but because you’ve hired help. The whole idea is to make money off other people’s labor. Your workers are assets, not liabilities. Laying off people does not preserve profits, it cancels them. Anyone who doesn’t understand that, doesn’t make it. My guess is, you work for someone else.

    • When your business assets only go so far you may have to lay people off or not hire. Anyone who has run a business knows it is about surviving in business not just purty words!!!!!!!!! All those words do not help anyone if you go out of business

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