New research from the University of Michigan and Carnegie Mellon University suggests that most independent businesses can manage the increased costs of higher minimum wages by generating new revenues, resulting in only minor adjustments to employment. By analyzing U.S. tax returns comprehensively, the study refutes worries that small businesses bear the brunt of minimum wage hikes.
However, it highlights a more pronounced effect on the restaurant sector. In this industry, some smaller, less efficient restaurants may close due to higher minimum wages, while larger, more efficient ones see improved worker retention rates and even increased profits for those that remain operational.
Appropriate redistribution
“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,” the researchers explain.
“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.”
The researchers delved into various aspects such as revenue, employment, and profits following minimum wage hikes across six states. They achieved this by constructing panel data that aligns the universe of U.S. tax returns of independent businesses with individual income tax returns of workers and owners over a decade. By comparing states that raised their minimum wages in 2014 to those that didn’t, they drew insightful conclusions.
Supporting low-income workers
For workers, the key takeaway is that higher minimum wages ultimately boost the earnings of low-income and young workers, who are most affected by such policies, by thousands of dollars annually. Additionally, these workers are, on average, just as likely to remain employed post-wage increase.
The impact of minimum wage hikes extends to hiring and retention practices, leading to shifts in the composition of workers within the restaurant sector and across different firms. While wage hikes enhance worker retention, they also slightly reduce hiring, primarily affecting part-time teenage workers. However, any slight declines in hiring among certain restaurants are counterbalanced by other firms.
On the business front, independent businesses in industries like restaurants and retail generally manage to absorb the minimum wage increases through increased revenues. Particularly in restaurants, where low-earning workers constitute a significant portion of variable costs, the effect may lead to the closure of less productive small establishments.
The researchers note that this adverse impact on some small businesses might explain opposition to minimum wage increases among certain owners. However, they assert that for minimum wage increases of the magnitude seen in 2014, policymakers need not fret about a tradeoff between redistribution and job losses or distress among independent businesses.
