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

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

Many small-business organizations warn that an increase woulddisproportionately hurt entrepreneurs, who generally have less cashto cover expenses. If they can't get a high enough return forthe added investment, the result may be fewer new hires. "Myconcern is that if you make the minimum wage too high, you'llbe excluding some people from the labor market, the folks thatdon't have experience or skills," says Ron Bird, chiefeconomist for the Employment Policy Foundation, a nonpartisan,nonprofit organization that analyzes workplace trends. Raisingminimum wage, he adds, "creates a barrier to entrepreneurshipbecause it adds to what you have to do to justify expanding yourbusiness. So it has a negative effect on job creation and thecreation of new businesses."

But some research suggests small businesses have not suffered asa result of past minimum wage increases. A 1998 study by the JeromeLevy Economics Institute at Bard College, for example, found thatthe 1997 increase from $4.75 to $5.15 affected hiring decisions atonly 6.2 percent of the small businesses surveyed. When a secondstudy was conducted a year later asking whether small businesseswould be affected by an increase to $6 an hour, 84.3 percent saidthe hike would have no impact. Of the 15 percent that said itwould, nearly half said they would hire fewer workers, butwouldn't decrease their staff. "And most people who claimthat the minimum wage is going to have a detrimental effect usuallysay 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 (SUNYPress). When small-business owners were asked whether they would beaffected if the minimum wage were raised to $7.25, the percentagewho said it would have no impact decreased from 84.3 percent to61.9 percent. "So there's a limit to how high you canraise the minimum wage," he says. "But it also suggeststhat the current $5.15 an hour is clearly not [at thelimit]."

Others contend that the minimum wage increase would also createa ripple effect throughout companies; those who today are earningwhat will be minimum wage after the legislation is passed will wantincreases as well. But if the money isn't there, thoseemployees could end up getting the short end of the stick. "Sothis is something that needs to be looked at much morecarefully," says Bird.

Proponents of the legislation, on the other hand, say the matterhas been examined carefully enough, and a boost in the minimum wageis long overdue. They say minimum wage workers, many of whom areprimary earners in their families, have been barely subsisting atthe poverty level for too long. According to the AFL-CIO, once anhourly wage of $5.15 is adjusted for inflation, it's 21 percentless than it was in 1979. "So this would help catch theminimum wage back up to the real value it once had," says anaide to Sen. Kennedy. "Every year the minimum wage isn'traised, 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-businesstax relief to be included in any minimum wage legislation. But itseems unlikely in the wake of the Senate seat changes. Still, evensome who oppose the legislation say that with the talent war stillraging, and the labor market tight, a higher minimum wage probablywon't hurt most small businesses, at least in the near term."Although you don't know what the impact will be threeyears out," says Susan Walthall, acting chief counsel foradvocacy at the SBA, "it probably won't have too much ofan impact on most firms."

C.J. Prince is a New York City writer who specializes inbusiness topics and the executive editor of Chief Executivemagazine.

Contact Sources

• Employment Policy Foundation
  (202) 789-8685, www.epf.org
• Oren Levin-Waldman
  14 Roble Rd., Wesley Hills, NY 10901, owaldman@opponline.net
• SBA Office of Advocacy
  (202) 205-6830, www.sbz.gov/advo.