The impact of the minimum wage on small businesses is a complex and controversial issue, and opinions on the matter vary widely. Some argue that increasing the minimum wage could lead to higher labor costs and reduced profits for small businesses, while others contend that a higher minimum wage can actually benefit small businesses by boosting consumer spending and reducing turnover.

Critics of the minimum wage have various arguments that they believe result in particular harm being imposed on small businesses, including:

• Increased labor costs: Small businesses with low profit margins may struggle to absorb the increased labor costs associated with a higher minimum wage, potentially leading to reduced profits or even closure.
• Fewer job opportunities: Small businesses may be forced to cut back on hiring or reduce hours for existing workers in order to offset the increased labor costs of a higher minimum wage, potentially leading to fewer job opportunities.
• Unfair competition: Small businesses may struggle to compete with larger companies that have more resources to absorb the increased labor costs of a higher minimum wage.

Theory meets reality

Research from UC Berkeley explores whether these fears are actually witnessed in reality, and suggests that they may be overblown. Indeed, the research suggests that small businesses don’t appear to cut jobs in response to an increase in the minimum wage, and may actually benefit from it instead.

“A minimum wage increase doesn’t kill jobs,” the researchers explain. “It kills job vacancies, not jobs. The higher wage makes it easier to recruit workers and retain them. Turnover rates go down. Other research shows that those workers are likely to be a little more productive, as well.”

The federal minimum wage has remained stagnant at $7.25 an hour for over a decade now, yet California and numerous state and municipal governments have taken the matter into their own hands, raising their minimum wage rates to $15.50 or higher.

The paper aims to investigate the effects of these minimum wage hikes on small businesses operating in the low-wage sector, which encompasses a diverse range of enterprises such as restaurants, grocery and retail stores, and childcare facilities. It’s the second recent study by the team that challenges the conventional wisdom on minimum wages.

Boosting financial security

A working paper that emerged last autumn has demonstrated that minimum wages set at $15 or higher in various states and municipalities, including California, have improved the financial security of employees, without causing their employers to resort to job cuts.

In the past, business organizations have warned that teenage workers are most susceptible to losing their jobs when the minimum wage is increased. However, the researchers found that higher wages often enabled teenage employees to work fewer hours, leading to increased study time.

These findings carry important implications for public policy, not the least of which is a reduction in poverty and financial insecurity. Additionally, governments currently expend millions of dollars annually on tax incentives for companies that confront government-mandated minimum wage hikes, expenses that may prove unnecessary.

Mutually beneficial

According to the researchers, when employers learn that minimum wages will increase, they typically focus on the impact it will have on their own businesses. They worry about how they can manage the higher costs without having to reduce staff or profits.

However, the authors suggest that if all businesses in the industry face the same shocks and costs, the market response might be a moderate price increase. In fact, some restaurants have already passed on the increased costs to consumers, and the small price increase did not drive them away. Moreover, higher wages result in less employee turnover, less advertising, and less training for new workers, which ultimately benefits the owners and does not harm their profits.

The researchers found that a higher minimum wage led to lower employment only among high school-age workers in small businesses. While employment in that sector decreased, teens overall earned more, enabling them to work less and study more. The study also cites recent research that shows a 10% increase in the minimum wage reduces the high school dropout rate by about 10% among students from low socio-economic backgrounds.

What’s more, the paper found that the effects are amplified by the growing availability of college financial aid programs that reward high school students for strong academic performance. Therefore, there are now more incentives for adolescents to focus on studies in the market at large. The authors conclude that the long-term impact on teens substituting time studying for time working in the labor market should be considered a benefit, not a cost, of minimum wage policies.

They hope that their work will go some way towards shifting attitudes across the business and policy communities to increases in minimum wage laws and reframing such policies as commercially positive rather than negative.