Small, medium-sized independent U.S. firms adapted well to minimum wage hikes, as did workers
Carnegie Mellon University
Proposals to raise the minimum wage are often met with arguments that independent businesses may be vulnerable to such increases. In a new study, “Who’s Afraid of the Minimum Wage? Measuring the Impacts on Independent Businesses Using Matched U.S. Tax Returns,” researchers examined how small and medium-sized firms accommodated minimum wage hikes along product and labor market margins. The study found that firms reacted to increases in minimum wage differently depending on their size, but most adapted well, and the effect on workers was also largely positive.
Conducted by researchers at Carnegie Mellon University and the University of Michigan, the study is published in The Quarterly Journal of Economics.
“Although recent research has found that minimum wage increases have had few harmful effects on employment in the short run, fears that independent businesses operate on margins too slim to accommodate cost increases or face demand too elastic to pass costs to consumers have motivated small business exemptions and opposition to raising wage floors,” explains Max Risch, Assistant Professor of Accounting at Carnegie Mellon’s Tepper School of Business, who coauthored the study.“At the same time, surveys repeatedly find that independent business owners are divided on minimum wage policy, with large shares actually supporting higher wage floors.”
Researchers used a data set drawn from U.S. tax records from 2010 to 2019, state minimum wage changes, and data on low-earning and young workers (who may be most vulnerable to adjustments in wages). They measured responses from 217,000 firms across several margins, including employment, compensation to different types of workers, expenditures on non-labor inputs, revenues, profits, and firms’ exit and entry. Among the study’s findings:
- On average, firms in highly exposed industries, largely restaurants and retail, did not substantially reduce employment; that is, they did not lay off workers, but moderately reduced part-time hiring. These firms fully financed the new labor costs with new revenues, leaving average owner profits unchanged.
- However, higher wage floors forestalled entry, particularly for less productive firms, reducing the number of independent firms operating in these industries by roughly 2 percent. Yet even these industries did not shrink; instead, incumbent responses and strong positive selection among entrants reshaped industries that relied heavily on low-wage workers, yielding fewer but more productive firms after the cost shock.
- In terms of workers, average earnings rose substantially with the minimum wage, and workers were no less likely to be employed. Worker transitions indicate that minimum wage increases boosted retention and that worker reallocation from independent firms toward large corporations buffered the impacts of the reduced hiring at independent firms.
“Amid limited understanding of how markets adjust to accommodate wage hikes, our study offers a comprehensive examination of this issue, informing the debate on how U.S. independent firms respond,” says Nirupama L. Rao, Assistant Professor of Business Economics and Public Policy at the University of Michigan’s Ross School of Business. “Contrary to concerns that such wage increases might imperil small firms, independent firms demonstrate remarkable adaptability.”
The study was supported by the Washington Center for Equitable Growth.
Journal
The Quarterly Journal of Economics
Article Title
Who’s Afraid of the Minimum Wage? Measuring the Impacts on Independent Businesses Using Matched U.S. Tax Returns
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