Big Federal Wage Hike Would Hurt Small Business Workers and Their Employers

By SBE Council at 26 January, 2021, 11:32 am

by Raymond J. Keating-

President Joe Biden favors more than doubling the federal minimum wage mandate from $7.25 per hour to $15. But as with any massive regulatory measure imposed by government, while it might sound nice to many and serve up benefits to some, such a mandate comes with real and significant costs for the most vulnerable workers and small businesses.

President Biden is looking to launch this process by moving to impose a $15 minimum wage on federal contractors. But the president has made clear his goal is to impose a national $15 minimum wage.

Job Loss and Squeeze on Small Businesses

Problems with raising the minimum wage rank as one of the few areas where widespread agreement exists among economists. First, and most clearly, a higher government-imposed minimum wage reduces job opportunities for low-income, young, and/or inexperienced workers. An assortment of jobs are simply priced out of the marketplace. Those positions wind up being terminated, and the tasks either automated, shifted to other workers, or eliminated altogether.

Second, for businesses - mainly, small enterprises - unable to automate or eliminate jobs, such as in very labor-intensive sectors, the increased costs of a higher government-imposed minimum wage result in higher costs that can force reductions in other areas of the business, such as in investments in upkeep or expansion, other forms of compensation, hiring other employees, and/or reduced profits.

Indeed, for small businesses operating on thin margins, especially in difficult economic times, a mandated minimum wage increase can serve as a tipping point that leads to closing up shop. (See the impact of a higher minimum wage on assorted small businesses at Faces of 15.)

Economists Agree on Harmful Effects

Also, consider the following findings in a survey of economists released by the Employment Policies Institute and conducted by the University of New Hampshire Survey Center:

'72 percent of U.S.-based economists oppose a $15 federal minimum wage… The survey asks several additional questions that shed light on this topline finding. Five out of six respondents (83 percent) said that a $15 federal minimum wage would have harmful effects on youth employment levels. Three-quarters (76 percent) of respondents said that a $15 minimum wage would have a negative effect on the number of jobs available. And two-thirds (67 percent) of respondents said that a $15 minimum wage would make it more difficult for small businesses to stay in business.'

Research Supports the Harsh Impact of $15 Wage Hike

While the research obviously backs up the ills of a minimum wage increase, it's worth highlighting specific findings. Consider the following reported by Jonathan Meer, an economist at Texas A&M University, on raising the federal minimum wage to $15 per hour:

'When debate focuses on the total number of jobs lost or gained, it hides this potentially nasty distribution of the benefits: a recent college graduate with a barista job may get a few more dollars an hour, but the high school dropout finds it harder to get and keep a job. Those who have the least to offer employers, might need more training, or are the biggest risks to hire will face the toughest challenges.'

'My research shows that when the minimum wage is raised, employers offset increased labor costs by reducing benefits like the generosity of health insurance. Other benefits, like free parking or flexibility in scheduling, are more difficult to measure but are also likely to be cut back. Employers will likely expect more work effort when they are forced to pay more, changing the nature of jobs. And in the longer run, economists have found that employers shift towards automation and expecting customers to do more things themselves- reducing job growth in ways that aren't always obvious. This damage takes time to be seen, which is one reason minimum wage hikes, like rent control, often seem appealing.''Recent evidence < /a> from Seattle's minimum wage increases show that it's precisely the most inexperienced workers who struggle the most in the face of high minimum wages. And another line of my own research finds that minimum wage increases cause employers shift towards workers with more credentials.'

The survey findings and Meer's research reflect straightforward economic analysis, and quite frankly, the economists in disagreement are simply supplanting economics with their personal political preferences.

The bottom line is that any kind of government mandate comes with commensurate costs. Government does not possess a magic wand by which it can impose mandates and make the accompanying costs disappear. And the costs of a higher minimum wage materialize in assorted ways, with the brunt of the burdens falling on vulnerable workers and small businesses.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.