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.