The minimum wage, small businesses, and the economy

February 14, 2013 at 11:07 am 3 comments

In President Obama’s State of the Union address on Tuesday night, he talked about raising the minimum wage, and indexing it to the cost of living:

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9 an hour. This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher. So here’s an idea that Gov. Romney and I actually agreed on last year: Let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.

Advocates for raising the minimum wage point out that it has not kept pace with inflation, and that it hardly provides workers a living wage. As the President said, those earning the minimum wage are still below the poverty level. Those against raising the minimum wage say that the cost to employers will be detrimental: their payroll costs will go up, they will stop hiring, they will lay off workers, and unemployment will spiral up.

The real outcome of raising the federal minimum wage is much more complicated.  It is true that the minimum wage has not kept up with the rising cost of living over the past few decades, which has significantly eroded its purchasing power. The tipped minimum wage– for workers such as waiters, servers, salon technicians, etc– has actually been frozen at $2.13 for the past 20 years.  The chart below from the Economic Policy Institute shows that if adjusted for inflation, the value of the minimum wage has decreased over time.

Raising the minimum wage would have some impact on employers, but recent research suggests that it would not have an impact on employment overall. Employers will respond to the minimum wage in a variety of ways that will have a variety of consequences– the linear connection between increasing the wage rate to firing workers isn’t linear, after all. Analyzing recent research on minimum wage increases, the Center for Economic and Policy Research found that while increasing the minimum wage had significant impacts on the wages of workers, the effect on employment is small.

In regard to small businesses, though some are against the increase, others see it as a positive. As we’ve discussed before, a top concern among small businesses is the weak consumer demand. Increasing the wages for people who will likely spend their money would be a good thing for small businesses. As one business owner said, “This increase will put more money in the pockets of workers who will spend it in their local economies. That will strengthen consumer purchasing power — exactly what small businesses need right now.”

The economic recovery has been marked by a growth in low-wage jobs, in which some people and communities continue to struggle and lag  behind. Growing income inequality was one factor that contributed to the severity of the Great Recession, and even though the recession is over, inequality persists and continues to grow. Increasing the minimum wage would help lift the floor for our lowest-paid workers, which would in turn strengthen the economy overall and benefit businesses of all sizes.



Entry filed under: Economic Development, Economy, Jobs & Employment, Small Business. Tags: , , , , , .

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  • 1. Erik  |  February 14, 2013 at 12:22 pm

    Indeed, it is a complex issue. Certainly no employer wants to pay their employees more money just like that, but it is good business at the end of the day.

    It’s funny that those generally opposed for the increase in minimum wage are usually running a company where they can only profit by paying low wages. The same ones who usually want to end “hand-outs” but don’t understand that those people who are receiving said hand-out probably work for their company…

    • 2. The Support Center  |  February 15, 2013 at 12:09 pm

      What it really points to is that those who speak on behalf of “small business” don’t always represent the needs or challenges of actual very small businesses. They need people in their communities who can afford to the goods and services that they offer– and to get there, we need people to be employed in good paying jobs.

      Thank you for your comment, and please share our blog with anyone who might be interested!

  • 3. shaundacosta89  |  February 16, 2013 at 8:28 pm

    I agree with your post, raising the minimum wage could give a substantial injection of spending power into the economy. Furthermore if set correctly it could reduce the amount of government transfers needed to the poor if unemployment does not increase as a result.


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