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How Escalating Minimum Wage Impacts Small Business

The topic of minimum wage increases has been discussed extensively in the media, in political forums and in private debates. While some lawmakers want to leave the minimum wage as it is, others are pushing to increase it in order to improve the financial situation of the working poor. In fact, several cities in the United States have already passed laws to gradually increase the minimum wage until it reaches $15 per hour. Although these wage increases may be beneficial to workers, small business owners are skeptical with regard to the effect a wage increase would have on their financial situations.

Understanding the Concern

The most obvious result of a raise to the minimum wage for a small business is an increase the business’s expenditures. When the minimum wage goes up, the total of small business wages paid out to employees for the same amount of work must go up as well. This increase in expenditures cuts into the company’s profit, which may lead to financial problems or even business failure. Business owners may end up laying off or reducing employee work hours to remain profitable. Some critics of the minimum wage increase have even argued that raising the wage would force businesses to raise their prices, which would be harmful to the very people the minimum wage increase was designed to help.

Relevant Research

In spite of the concerns posed by critics of a minimum wage increase, recent research indicates that the effect of a minimum wage increase may not be as harmful as some think. Studies have shown that states with higher minimum wage requirements experienced more payroll and employment growth than states with a lower minimum wage. The number of small businesses located in states with a higher minimum wage also grew twice as quickly as those that were located in states with a lower minimum wage. Furthermore, researchers were unable to find any link between minimum wage increases and increases in business failure.

Preparing for a Wage Increase

Regardless of your concerns, it is likely that the minimum wage will increase in the coming years. Congress has rarely waited so long to enact a minimum wage increase in the past, so an increase seems inevitable. In addition, even though the results of research indicate that minimum wage increases shouldn’t be harmful to small businesses as a demographic, the individual business may still suffer if it isn’t properly prepared for this change. If you are concerned about preparing for an eventual wage increase, please contact PADGETT BUSINESS SERVICES® for financial advice.