Does an Increase in the Minimum Wage Hurt Small Businesses?

Much has been said and written recently about raising the Federal or state minimum wage. One of the groups concerned about an increase in the minimum wage is the businesses that have employees earning this entry level amount.

Currently, the minimum wage in Ohio is $7.95 an hour, slightly higher than the national level of $7.25. The minimum hourly amount is $3.98 for employees such as those in food service who are expected to earn at least $30 a month in tips.

Some Pros & Cons

President Barack Obama and many others have recently proposed that this standard be raised to help those who work at this low end of the wage scale. Those in favor of this increase suggest that an increase in the minimum wage should occur so that workers can catch up with the cost of living and earn what is often referred to as a living wage. It also argued that this increase in earnings would provide more money for people to spend, thus helping the economy.

Not all business owners agree that raising the minimum wage is good for them or the economy. Many suggest that an increase in the minimum wage does not help the economy and can actually increase unemployment.

Their argument is based on basic economics. If the price of a product increases, the demand for that product will decrease. If the price of hiring minimum wage employees increases, the business owner may not be able to afford  hiring as many of these workers or at least may have to reduce the hours worked by these employees.

“Typically, small businesses lay off minimum wage workers when the minimum wage is raised (e.g., gas stations laying off full-service attendants). This raises unemployment and thus runs counter to the objective of reducing poverty," according to Vinnie Gajalla, Professor of Economics at Tiffin University.

“While no one can argue that the current minimum wage is not a living wage, many (if not most) of minimum wage earners work multiple jobs and/or have other family members working.  I don't think the minimum wage is intended to provide a comfortable life indefinitely - it should provide a first rung on the ladder of success.  Raising the minimum wage won't raise the ladder, but it will break off the bottom rung,” according to Rocky River’s John Miller who spent 40 years making decisions on automation/mechanization and international sourcing.

As with many issues in economics, it is difficult to prove whether an increase in the minimum wage really does increase the unemployment level. Economists and other experts argue for both sides of this dispute.

Miller believes that from a practical standpoint, raising the minimum wage damages competitiveness for the jobs most likely to provide the beginning of a career.  As wages rise, it becomes easier to justify replacing labor with automation, or domestic labor with offshore labor. The net result is fewer jobs (or shorter hours) for the people just beginning in the labor market or insufficiently skilled to advance.  Raising the minimum wage won't resolve these problems, but improving education and training can prepare workers to contribute more value to their enterprises and thus become valuable.

A "Hot" Issue

One of the challenges of writing this column was to get people to voice their opinions on the minimum wage issue. Several practicing business people declined offering an opinion on this topic presumably due to its politically charged nature.

Those opposed to the higher minimum wage could be viewed as not wanting to help those at the bottom end of the wage scale. Those who support the higher wage could be perceived by some as opposing small business.

For more information, Dr. Haan can be reached at 419-618-2867 or haanpc@tiffin.edu.