Since taking office, President Joe Biden has been making a push to raise the federal minimum wage from the current 7.25 USD an hour to 15 USD. However, both Republicans and centrist Democrats have been sceptical about the policy, believing that it will harm small businesses.
Some economists are against the minimum wage. According to data from the Bureau of Labour Statistics, half of all workers in 20 states earned less than 18 USD per hour in 2019 and the median hourly wage was less than 20 USD in 35 states. Setting a minimum wage at 15 USD and so close to the median would force many workers out of the labour market because companies would not agree to pay an average wage for a lower value worker and so many would become jobless. A sudden reduction in workforce would likely harm the productivity of small business. Also, a doubled minimum wage would considerably increase salary costs for all business during a pandemic, with a disproportionate effect on small business. Small businesses employ about 48% of the American workforce and most workers earn minimum wage. Thousands of such businesses have already closed due to the pandemic, and raising the minimum wage at this time may push even more into liquidation or unsustainable debt.
However, in a landmark study by David Card and Alan Krueger in the 1990s, New Jersey increased its hourly wage floor from 4.25 USD to 5.05 USD while neighbouring Pennsylvania kept its own at 4.25 USD. The two economists targeted fast food restaurants near the border of two states and collected employment data once before the minimum wage increase and again afterward. Results showed that employments in the restaurants went up in accordance with national levels rather than down and the authors found no indication that the opening of future restaurants would be affected. It is therefore not clear that a higher minimum wage would risk the workforce of small business.
Furthermore, a higher minimum wage would help small business hire qualified workers who usually are hired by large companies in a labour market known as a monopsony. Monopsonists are the dominant or sole employers in a certain labour market and so they can set prices for labour artificially low, rarely higher than the minimum wage. Higher minimum wages in this case can actually increase employment. People who may not have bothered to look for a job at 7.25 USD an hour may start searching if employers are paying 15 USD. Moreover, A higher minimum wage would create a level playing field, small businesses could now compete with the previously low wages only afforded by large corporations.
While a higher wage would increase small businesses liabilities in a crisis, these firms usually have very flexible prices and by increasing the prices of their product, they can pass the cost of the minimum wage onto their customers. A higher minimum wage can also make businesses more productive through improved worker morale and lower employee turnover. Additionally, the government may intervene to provide support and the US minimum wage law already allows exemptions for very small businesses. According to Mr. Biden’s proposal, the minimum wage will also be tied to economic conditions. indications of a recession could be an automatic trigger for a minimum wage holiday, a temporary lowering of minimum wage to provide relief to small businesses with high salary costs. Also, a higher minimum wage increases healthy competition, a core principle of a free-market economy, as the businesses that struggle to afford the new minimum wage are likely to fail regardless. The minimum wage seems Darwinian: driving weak competitors out. One Harvard Business School study in 2016, for instance, showed that a company with a 3.5-star on Yelp is more likely to fail after a minimum wage hike, but a five-star company is not. Keeping the minimum wage low to save the firms that have to rely on very low wages to survive stifles healthy competition.
The arguments against a dramatic rise in minimum wage include: it would price out low-skilled workers and cripple small business with increased wages. Yet there is evidence that an increased minimum wage increases employment and makes it easier for small business in a monopsonist low-wage labour market to hire value-added workers, attracting them with higher wages. Moreover, President Biden has anticipated these arguments and countered them with exemptions for very small businesses and temporary minimum wage holidays in times of recession. Lastly, it is debateable whether businesses should be propped up by a low minimum wage which barely provides a living. Overall, it seems small business has more to hope for than fear from Biden’s proposal. It might be time to revisit these arguments against minimum wage.
By Matthew Xiao
Sector Head: Jackson Philips