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Over the past few years, the movement to increase the federal minimum wage to $15 per hour has gained a considerable amount of momentum. Proponents of the minimum wage increase argue that $15 is the minimum hourly wage needed to establish an adequate standard of living. On the other hand, opponents argue that a dramatic increase in the minimum wage would have perverse economic consequences. Some also assert that the minimum wage should be regulated at the local, rather than federal, level.

Currently, the federal minimum wage is $7.25. The majority of states (29) have a local minimum wage above that rate, but, as of 2018, none has a rate as high as $15 per hour. The debate surrounding the federal minimum wage has inspired quite a few questions. Thus far, one of the most important questions has been, what does a minimum wage increase mean for small business owners?

 

Which Businesses are Most Affected by a Minimum Wage Increase?

Naturally, the businesses that will be most affected by a minimum wage increase will be the ones that are paying their employees less than $15 per hour. By being required to potentially double what they are paying employees, these businesses may need to make cuts, apply for temporary small business loans, or be willing to accept a lower profit margin.

A business’ operational flexibility will also influence whether their bottom line is adversely affected. A business that has the option to outsource a task, such as telecommunications or manufacturing, will have a greater financial incentive to do so. However, businesses who must have local employees, such as restaurants, may be affected differently. So far, the restaurant industry in New York and San Francisco—two early adopters of a higher minimum wage—has reportedly seen minimal blowback.

 

How Have Businesses Adjusted to a Higher Minimum Wage?

Because few businesses are willing to give up in the face of new legislation, owners in areas with higher minimum wages have been finding ways to get creative. Instead of laying off employees, some business owners have been decreasing the hours they stay open. Many restaurants, for example, prefer to pay their employees more during busy hours and cut staff between the hours of 2 and 5.

Another common response to increased minimum wages has been outsourcing labor or moving labor where it is cheaper. When minimum wage increases state-by-state, it is easier for companies to outsource and pursue cheaper labor (moving New Jersey production across the river to Pennsylvania, for example). However, if the minimum wage were increased on the federal level, this sort of “state hopping” phenomenon would not occur. Instead, international outsourcing would likely become more common.

In situations where neither cutbacks nor outsourcing is possible, some business owners have been passing the increased cost of labor on to consumers. In many cases, this strategy has been the most effective. “Often time they don’t blink at the price increase,” stated one business owner. But in some places, such as the grocery store, consumers are beginning to notice. In New Jersey, a proposed minimum wage increase would have raised the cost of groceries by an estimated $249 million.

 

What are the Pros and Cons of Raising the Minimum Wage?

Whether you are the owner of a business or not, it is easy to see that raising the minimum has both pros and cons attached to it. The primary benefit of raising the minimum wage is that it will increase the quality of life for low-wage workers. This may produce even further positive effects, such as lower poverty rates and a decreased burden on the welfare system. For business owners, higher wages may also decrease employee turnover rates and increase per-capita productivity.

At the same time, the potential consequences of a higher minimum wage should not be ignored. When all else is equal, a higher minimum wage skews a small business’ profit margins—when operating on the margins, the increased cost of labor may affect whether a business is financially viable in the long-run. While higher prices, outsourcing, cutbacks, and short-term loans can provide temporary solutions, there is no denying that many businesses will be affected.

 

Conclusion

Since it was first introduced in 1938, the federal minimum wage has remained an active subject of interest. Both proponents and opponents of a $15 federal wage seem to present valid points. But regardless of whether a higher minimum wage is a net good for society, business owners of all kinds may need to prepare for sudden change.

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Andrew Paniello | Andrew attended the University of Colorado and earned degrees in Finance and Political Science (Philosophy minor). He is currently a freelance writer with a primary emphasis on business topics. In his free time, Andrew enjoys playing piano, painting, hiking, and playing basketball.