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Pay Up

When the minimum wage rises, will small businesses get the downside?

If the changing of the Senate guard is an indicator of shifting political winds, entrepreneurs may soon pay employees higher minimum wages. Whether it's $1 over three years, as proposed by some Republicans, or $1.50 over 18 months, as Sen. Edward Kennedy (D-MA) has offered, some version of a national wage increase could pass by the fall.

Many small-business organizations warn that an increase would disproportionately hurt entrepreneurs, who generally have less cash to cover expenses. If they can't get a high enough return for the added investment, the result may be fewer new hires. "My concern is that if you make the minimum wage too high, you'll be excluding some people from the labor market, the folks that don't have experience or skills," says Ron Bird, chief economist for the Employment Policy Foundation, a nonpartisan, nonprofit organization that analyzes workplace trends. Raising minimum wage, he adds, "creates a barrier to entrepreneurship because it adds to what you have to do to justify expanding your business. So it has a negative effect on job creation and the creation of new businesses."

But some research suggests small businesses have not suffered as a result of past minimum wage increases. A 1998 study by the Jerome Levy Economics Institute at Bard College, for example, found that the 1997 increase from $4.75 to $5.15 affected hiring decisions at only 6.2 percent of the small businesses surveyed. When a second study was conducted a year later asking whether small businesses would be affected by an increase to $6 an hour, 84.3 percent said the hike would have no impact. Of the 15 percent that said it would, nearly half said they would hire fewer workers, but wouldn't decrease their staff. "And most people who claim that the minimum wage is going to have a detrimental effect usually say it's going to lead to layoffs," says Oren M. Levin-Waldman, who headed up the study at Jerome Levy.

But the second study does suggest a "tipping point," says Levin-Waldman, author of The Case of the Minimum Wage (SUNY Press). When small-business owners were asked whether they would be affected if the minimum wage were raised to $7.25, the percentage who said it would have no impact decreased from 84.3 percent to 61.9 percent. "So there's a limit to how high you can raise the minimum wage," he says. "But it also suggests that the current $5.15 an hour is clearly not [at the limit]."

Others contend that the minimum wage increase would also create a ripple effect throughout companies; those who today are earning what will be minimum wage after the legislation is passed will want increases as well. But if the money isn't there, those employees could end up getting the short end of the stick. "So this is something that needs to be looked at much more carefully," says Bird.

Proponents of the legislation, on the other hand, say the matter has been examined carefully enough, and a boost in the minimum wage is long overdue. They say minimum wage workers, many of whom are primary earners in their families, have been barely subsisting at the poverty level for too long. According to the AFL-CIO, once an hourly wage of $5.15 is adjusted for inflation, it's 21 percent less than it was in 1979. "So this would help catch the minimum wage back up to the real value it once had," says an aide to Sen. Kennedy. "Every year the minimum wage isn't raised, you lose ground because of inflation."

In an effort to offset the damage they fear it might do, small-business advocates have lobbied for additional small-business tax relief to be included in any minimum wage legislation. But it seems unlikely in the wake of the Senate seat changes. Still, even some who oppose the legislation say that with the talent war still raging, and the labor market tight, a higher minimum wage probably won't hurt most small businesses, at least in the near term. "Although you don't know what the impact will be three years out," says Susan Walthall, acting chief counsel for advocacy at the SBA, "it probably won't have too much of an impact on most firms."


C.J. Prince is a New York City writer who specializes in business topics and the executive editor of Chief Executive magazine.

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This article was originally published in the October 2001 print edition of Entrepreneur with the headline: Pay Up.

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