For people in entry-level jobs, a minimum wage increase seems like a major boon. A higher minimum wage means more money in workers’ pockets, right? Unfortunately, the answer is not that simple. In fact, minimum wage hikes can severely damage budding small businesses, which affects the U.S. economy on a larger scale.
According to the U.S. Small Business Administration, the U.S. has more than 30 million small businesses, which make up over 99 percent of companies in the nation. These businesses employ more than 60 million people – roughly half of all national workers. Not all of these small businesses rely on entry-level workers that would receive an increase in pay, but many of them do.
“Small retailer stores or restaurants or small mechanic shops — any of those small businesses are relying on employees in the service sector,” National Federation of Independent Business Arizona State Director Chad Heinrich said. “Sometimes those jobs rely on gratuities, and in many cases, they’re entry level jobs. Those entry level workers are coming into a small business with little to no experience — maybe in the job market as a whole. The small business owner is taking a risk when they’re hiring these employees with little to no experience.”
In addition to its negative consequences for small businesses, a minimum wage jump would also impose harmful effects on workers and consumers. Costly wages for employees will decrease smaller business’ willingness to hire new workers, which leads to less opportunities for Arizona citizens looking for employment.
At the same time, small businesses will have to increase prices to offset the rise in wages. This increases prices for consumers, which reduces their purchasing power and, in effect, detracts from their disposable income. Facing higher prices, consumers will naturally take their business to other, more affordable options. This could lead to the closure of small businesses who can’t keep up with the low prices that larger corporations can offer.
“We’re playing defense on this one, to state the obvious,” NFIB VP of Federal Public Policy Jon Kurrle said. “A larger company can absorb costs in a way that a smaller business can’t, and also make technology investments in a way that not all small businesses can.”
The “Raise the Wage Act,” introduced in Congress earlier this year, would increase the minimum wage to $15/hour by 2024. The bill currently has 190 co-sponsors, and 55 percent of registered voters support it, according to a Hill-HarrisX poll.
Nevertheless, the legislation would create unbearable economic burdens for small businesses. The NFIB found that the legislation will result in the loss of 6 million jobs and $980 billion in GDP by 2029. In fact, by then, Americans will have $103 billion less in disposable income and a loss of $980 billion in GDP.
“When you think about increasing [the minimum wage], you’re going to affect a small business’s ability to expand,” Heinrich said. “A little over 40% of the employees in Arizona are employees of small business. If you’re impeding the ability of small businesses to hire employees, you’re going to impact the state economy directly.”