The discussion of minimum wage can be difficult to navigate, especially from the perspective of a small business owner. While some employers believe increasing the minimum wage will provide their employees with a better life and benefit the economy, others are concerned about the negative consequences of increased expenses.
In order to create balance between businesses and the economic health of the city, state or nation, there needs to be a conversation about the effects of an increased minimum wage. This means understanding how it could affect small and midsize businesses, and how to implement increases so as not to shock the local economy.
What is the federal minimum wage?
Introduced in 1938 as part of the Fair Labor Standards Act (FLSA), the federal minimum wage provides a threshold below which wages cannot legally drop – with some notable exceptions, such as jobs that generate tips alongside an hourly wage.
The current federal minimum wage is $7.25 per hour. The last time it increased was July 24, 2009, when it went from $6.55 for all covered, nonexempt workers to $7.25. More than 12 years have passed since then, which is the longest period without an increase to the federal minimum wage since its inception.
Tracking the value of the federal minimum wage against inflation
It is not just the nominal minimum wage that matters, but also its purchasing power against the contemporary cost of living. While the federal minimum wage has increased from 25 cents per hour in 1938 to $7.25 per hour today, it is not indexed to inflation (the decline in purchasing power of a dollar, which is expressed by an increase in costs of living, including housing, transportation, utilities and necessary goods like groceries). Therefore, over time, the real value of the minimum wage has declined substantially.
Since 2009, when the federal minimum wage was last raised, the value has dropped by 21% due to inflation. Since 1968, when the federal minimum wage was $1.60 per hour – or at its peak value of $11.12 per hour in 2021 dollars – the value of the minimum wage has declined by more than 34%.
Tipped minimum wage
The tipped minimum wage is distinct from the hourly minimum wage. Tipped workers, such as servers in a restaurant, are not covered by the same minimum wage as hourly workers. Instead, their employers are required to pay the federal tipped minimum wage, which currently stands at $2.13 per hour, according to the U.S. Department of Labor.
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Minimum wage at the state and city level
In addition to the federal minimum wage, many states and cities have their own minimum wage laws and ordinances by which businesses in their jurisdiction must abide. While the federal minimum wage hasn't budged in more than a decade, losing value year over year, many of these states and cities have continued to raise their minimum wages, some to as much as $15 per hour (and even higher in some local communities).
Today, 30 states plus Washington, D.C., maintain a higher minimum wage than the federal minimum wage. Since 2014, 28 of those states, as well as the nation's capital, have revised their minimum wage laws upward. Additionally, 45 municipalities and cities have adopted minimum wage laws that are above their state's minimum wage.
What is the highest state minimum wage?
Washington state and California will have the highest state minimum wages in 2022. In Washington, the minimum wage is being raised $1 to $14.49 per hour. In California, the minimum wage is also being raised $1 per hour. That means businesses with 25 employees or fewer now must pay employees at least $14 per hour, while businesses with more than 25 employees must pay $15 per hour in 2022. Washington, D.C., currently has a $15.20 minimum wage. Also, the minimum wage in Massachusetts is being raised to $14.25 in 2022.
What is the highest local minimum wage?
The highest local minimum wage is in Seattle. The minimum wage there is increasing to $17.27 per hour in 2022 for businesses with at least 500 employees or businesses with fewer than 500 employees that don't pay for benefits. All other businesses in Seattle pay $15.75 per hour. Three California cities also have minimum wages that top $17. Employers in Emeryville must pay $17.13 per hour, while those in Sunnyvale and Mountain View are required to pay $17.10 per hour in 2022.
What is the lowest state minimum wage?
Georgia and Wyoming both have state minimum wages of $5.15 per hour. However, employers in these states must abide by the FLSA and pay the federal minimum wage to their employees.
Indexing the minimum wage to inflation
In 18 states and Washington, D.C., the minimum wage is indexed to inflation. That means the minimum wage in these states does not suffer the same decline in real value that plagues the federal minimum wage. Instead, the wage is increased (usually annually) directly alongside the rate of inflation, independent of any legislative increases.
What is the impact of increasing the minimum wage?
According to a study by the Economic Policy Institute on minimum wage's impact on various demographics, workers today are making "substantially less" than workers earned five decades ago. Implementing the Raise the Wage Act of 2021 would benefit 32 million workers, including essential and frontline workers, low-wage workers, those unable to work from home, and those who are supporting families. This act would increase the minimum wage to $15 per hour by 2025, which would end poverty-level wages and ensure workers are able to meet their basic needs. An increase in the national minimum wage would benefit affected workers by providing over $108 billion in additional wages in 2025.
What do minimum wage increases mean for small businesses?
If you operate a business in a state or city that has increased its minimum wage, you will have to begin paying your employees that rate or face fines, the threat of a lawsuit or even criminal prosecution for repeated and willful violations of minimum wage laws. The same is true for violations of the federal minimum wage if you operate a business in a state with no minimum wage or a lower minimum wage than the federal threshold.
Naturally, this mandatory upward pressure on wages represents an additional expense for small business owners. Often, this means finding ways to cut other expenses, boost revenue or both. In the short term, minimum wage increases could lead to measures like price hikes, negotiations with suppliers or a need for a working capital loan. In extreme cases, small businesses might need to institute furloughs or even layoffs. In an NFIB Research Center survey of employers who believe they would be negatively impacted by a rise in the minimum wage, 58% said they would reduce the number of employees, 60% would cut down employees' hours, 87% would raise prices of products, and 56% would hire more part-time employees.
The difficulty of adjusting to a heightened minimum wage is not unknown to public policymakers, who, in many cases, introduce minimum wage increases on a graduated timetable. For example, when California first passed legislation that would increase its state minimum wage to $15 per hour, it also established a plan for phasing in the increase. The minimum wage in California is set to increase by $1 per hour each year until businesses with 26 or more employees pay a minimum wage of $15 per hour by 2022 and businesses with 25 or fewer employees follow suit in 2023.
Phased minimum wage increases are commonplace and designed to lessen the short-term economic shock to employers. But what about the long-term effects of minimum wage increases? Research suggests it could be just as beneficial to small businesses as it is to their workers.
Minimum wage increases could mean increased consumer spending
Research suggests that minimum wage increases are not the killer of jobs and businesses that some claim. A minimum wage study by UC Berkeley economists and alumni found that minimum wage increases would reduce poverty levels and put more disposable income in the hands of working-class people.
"Raising the minimum wage is a simple, direct way that we can improve the incomes of low-wage workers, pull many poor families out of poverty and pull many children out of poverty," said Ken Jacobs, chair of the UC Berkeley Center for Labor Research and Education, in a statement. "It allows us to do it in a way that's good for the overall economy."
Typically, consumer spending rises as wages increase because workers are using their money to purchase goods and services from a variety of businesses. Their money is benefiting the economy as a whole. Thus, a wage increase for low-wage households will lead to increased economic activity within those communities and flow into local small businesses.
Do minimum wage increases kill jobs?
A common argument against minimum wage increases is that they will result in the loss of jobs. However, research suggests the opposite could be true. In one study, economists David Card and Alan B. Krueger examined a 1992 minimum wage hike in New Jersey and compared how the restaurant industry (often considered to be the most impacted by minimum wage increases) fared against similar establishments in neighboring Pennsylvania. They found, surprisingly, that New Jersey's fast-food employment grew and outpaced Pennsylvania's that year.
More recently, a 2021 study by Anna Godoey and Michael Reich examined the effects of minimum wage in low-wage areas, where the wage ratios are higher than state-based ratios. The report concluded that researchers "[did] not detect adverse effects on employment, weekly hours or annual weeks worked." They also found no negative effects on the employment of women, Blacks or Hispanics.
A recent survey of 2,157 small business owners by CNBC and SurveyMonkey found that 44% of small business owners support raising the federal minimum wage to $15 per hour. According to the survey, 16% of businesses would need to raise workers' wages if it were increased to $15, 20% would lay off workers and 48% wouldn't have to raise wages or lay off workers. This survey was conducted in January 2021 during the coronavirus pandemic and reflects all decisions companies made to survive the economic fallout.
Minimum wage hikes aren't all bad for small business
While any increase in expenses, especially a government-mandated one like the minimum wage, means some uncomfortable adjustments for small businesses, increases in the minimum wage could have beneficial short-term and long-term effects for local and regional economies. When working people have more money to spend, they tend to purchase goods and services from small and midsize businesses in their communities. Moreover, there is significant evidence that minimum wage increases do not kill jobs in the long term, but ultimately contribute to broader economic growth and an increase in job opportunities. However, minimum wage increases will likely prompt small and midsize businesses to take short-term measures to boost revenues and cut expenses.
For more than 20 states and many cities in the United States, the minimum wage will increase this year. Small business owners in those areas should consult accountants on how to prepare for the increase in payroll expenses. However, they should also seek to take advantage of the likely bump in wealth for many of their local customers.
Sean Peek contributed to the writing and reporting in this article.