Could Increasing the Minimum Wage be Good for Small Businesses?

July 24, 2014

Conventional wisdom provides that increases to the minimum wage are bad for small business. After all, income that business owners have to spend on labor costs increases what it costs when starting new businesses and uses money that could be invested in real estate when expanding a business. However, a recent study shows that a majority of small business owners with employees actually support an increase in the minimum wage, and that they have good reasons.

A Boon for Small Businesses

The New Pittsburgh Courier reports that a poll sponsored by the American Sustainable Business Council shows that over 60% of small business owners with employees favor increasing the federal minimum wage from $7.25 to $10.0 in three stages. (California’s minimum wage is currently $9.00 an hour and is scheduled to increase to $10.00 in 2016, and some cities like San Francisco have even higher minimum wages). The American Sustainable Business Council is an advocacy group that represents 200,000 businesses, and that actively represents businesses that support an increase in minimum wage. One small businesswoman, Sherry Stewart Deutschmann of LetterLogic in Nashville, Tennessee, argues that when employees are paid more they have more money to spend at all businesses. For that reason, she pays her employees $12.00 an hour. The theory is that with increased wages, consumers have increased purchasing power and are more likely to spend money on elastic goods and services, which increases profits of the small businesses that provide those goods and services.

Surveys of the general public also show broad support for an increased minimum wage. A Pew Research Center survey found that 71% of people favor an increase in the federal minimum wage from $7.25 to $9.00. Pew’s research also revealed other interesting facts about the federal minimum wage.

If you adjust for inflation, the federal minimum wage peaked in 1968, when it was $8.56/hour in 2012 dollars. Since the last time the federal minimum wage was raised in 2009, it has lost about 5.8% of its purchasing power due to inflation.

The conventional wisdom that only young people starting out make minimum wage is not true. Roughly 51% of minimum wage workers are between the ages of 16 and 24. The rest are full adults by any standard, even old enough to rent a car and get cheaper car insurance.

Over 21 million workers would be affected by raising the minimum wage to $10.10 by July 2015, including many workers in California. Over 85% of those workers are age 20 or older.

This is not to say that a minimum wage increase would help all small businesses. If your good or service is an inelastic one that people purchase even in dire financial times, your business may not be helped by an increase. Or, if you provide a luxury good or service and your customer base is exclusively wealthy, you obviously would not be benefited. But if your average customer would have more money in his or her pocket because of an increase, an increase may very well lead to more money in your cash register in the long run.

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