The Effects of the Minimum Wage: A Business Response

Article excerpt

A common refrain from politicians who oppose increases in the minimum wage is that an increase will hurt small businesses, possibly affecting their ability to remain in business [Wiseman 1998]. And yet, very little information about what businesses actually think exists. There is considerable speculation about them based on theoretical constructs, and additionally there may even be anecdotal evidence that they will be adversely affected, but to date no real studies have been done to ascertain how either they responded to previous increases in the minimum wage or how they might respond to fixture increases. Despite the fact that small businesses may employ half of private sector employees [Wiatrowski 1994], little is known about their hiring practices and what factors are likely to affect them.

A survey of employer responses represents a much needed contribution to the literature. Still, the scope of such a survey has its limitations. First, survey data based on the opinions of employers may not enable us to make conclusive generalizations. Second, the responses that employers give at the moment are based on the particulars of their economic situations. Employers who do not believe that an increase in the minimum wage will necessarily adversely affect them now while things are good may feel differently as their economic situations change. To this extent, data based on opinion may only represent a snapshot in time. Despite these limitations, it is important to hear from those employers that in theory--or according to the conventional wisdom--are likely to be most affected. The problem with much of the data is that it ignores this part of the story, which is quite important. After all, how can we know whether, and to what extent, the minimum wage will affect them if we do not ask? Moreover, the purpo se of this survey isn't so much to serve as a decisive test of orthodox theory under conditions of perfect competition as it is to add to the newer literature in an attempt to paint a more complete picture of the minimum wage.

The Survey

The Levy Institute Survey of small business was designed to obtain information about the hiring practices of small business as they relate to questions concerning the recent reform of the welfare system and increases in the minimum wage. It is based on a stratified sample of 560 small businesses (businesses with no more than 500 employees, which is consistent with the definition of small businesses by the Small Business Administration) across industry types, randomly selected from a national directory for small businesses. The survey was conducted by phone over a three week period during winter 1998. Respondents were asked whether the last minimum wage increase, which took effect during fall 1997, affected their hiring and employment decisions. They were also asked whether their decisions would be affected by a further increase in the minimum wage from $5.15 to $6.00 an hour.

Waltman et. al raise the question of whether an increase in the minimum wage would lead to an increase in business failures, as is often claimed among those who oppose increases. Looking at data on failure rates published by Dunn and Bradstreet, they found there to be no more business failures in those years following minimum wage increases than in those years in which there were no increases. Not only were there no more business failures following minimum wage increases, but the rate of failures appeared to be less the larger the increase was [Waltman et al. 19981. Similarly, as Table 1 makes clear, very few small businesses (6.2 percent) in the Levy survey felt that the recent hike in the minimum wage affected their overall hiring or employment practices. Although the percentage of businesses who would be affected were the minimum wage increased to $6.00 an hour is somewhat larger (20.7 percent), an increase of more than 300 percent, it is still small relative to the entire sample. The percentages alone in dicate that minimum wage increases would not have the dire consequences often predicted. …