Minimum Wage Study Debunks Business Claim

While minimum wage increases do not significantly impact small businesses on average, some industries are more affected than others.

How much do increases in the minimum wage impact on small businesses? Not very much, new research claims.

The federal minimum wage in the U.S. 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.

The study drew on data from six states exploring revenue, employment and profits of independent business 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.

What they found was that, on average, independent businesses were able to accommodate these minimum wage increases through higher revenues. “We even observe small average increases in owner profits,” the authors write.

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, said that these results may help policymakers weigh up the impacts of wage increases on small businesses, while hopefully easing the concerns of many small business owners.

“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,” Rao said in a statement.

“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.”

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.

“The strong adverse impact on some small firms help explain the opposition among some business owners,” Rao and Risch write.

Those restaurants that do survive tend to see higher revenues and also increased worker retention.

The authors conclude 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.

The full findings of the study are published in a working paper on Rao’s website.

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