Increases in the minimum wage have little impact on small businesses, new research claims.
The federal minimum wage in the United States for covered nonexempt employees is $7.25 per hour, although many states have their own laws. Proposals to increase this figure are often met with resistance from small business owners, concerned about how they will be able to afford the rising costs.
However, new research from the University of Michigan and Carnegie Mellon University suggests that most small business owners may not need to worry about rising wages.
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The study drew on data from six states that explored revenue, employment and profits of independent businesses following increases in the minimum wage over a 10-year period. Specifically, the data compared tax returns from firms and workers in states that had increased their minimum wage in 2014 to those that did not.
"Proposals to raise the minimum wage have long been met with concerns that independent businesses can't weather the higher costs," Nirupama Rao, an assistant professor of business administration, business economics and public policy at the University of Michigan, who co-authored the study with Max Risch from Carnegie Mellon, told Newsweek.
"We show definitively that the vast majority can finance the added costs with new revenues and do not engage in widespread layoffs as has been feared."
In fact, Rao said that their results suggest that minimum wage increases can actually benefit the majority of smaller businesses and their workers.
"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 said.
However, when analyzing this data by sector, some small businesses did show clear losses. Restaurants, in particular, were most likely to be impacted by these changes, with some smaller restaurants being forced to close in line with rising wages.
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"In the restaurant industry where minimum wages bite most sharply, exit rates rise. But rather than shuttering otherwise healthy businesses, raising the minimum wage winnows the productivity distribution of restaurants, rendering the industry more efficient," Rao said.
"In this way, through exit and entry, the minimum wage shapes the productivity distribution of restaurants in a manner akin to how the emergence of new technologies, exposure to international trade, and recessions."
Adding to this, those restaurants that do survive tend to see higher revenues and also increased worker retention.
"Surviving independent restaurants benefit from higher worker retention, workers transitioning from smaller firms to larger firms and even see slightly higher average profits following the minimum wage increase," Rao said.
When all is said and done, the biggest losers are the consumers who tend to foot the bill for the majority of rising wages.
"Ultimately, our paper shows that higher wage floors raise the incomes of low-earning workers with the costs borne in part by the small share of owners whose firms shutter, and largely by consumers who finance the revenue increases that offset added wage costs and leave most business owners no worse off," Rao said.
Rao and Risch conclude in their study that, while wage increases do negatively impact a small number of independent businesses, small increases in the minimum wage are unlikely to lead to "swaths of distressed independent businesses" on average.
"For all the hue and cry over minimum wage policy, I think one of my major takeaways is that for the vast majority of even independent firms, they just don't matter that much," Rao said. "The wage bill impacts can be offset with small revenue increases, and most businesses will continue to basically operate as usual, albeit with higher compensation for their lowest-earning workers financed by consumers.
"Would this be different if we tried to raise the minimum wage to $30? Absolutely. But for the increases we have seen—the ones we examine raised the minimum wage by roughly 30 percent—they just don't change costs enough to upend these firms."
The full findings of the study are published in a working paper on Rao's website.
Update 4/4/24, 2:07 p.m. ET: This article was updated to include comment from Nirupama Rao and additional information.
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