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Evidence from the U.S. and Israel shows that minimum wages disproportionately hurt small businesses and their owners

In his History of Economic Thought, the economist Lewis H. Haney put forward two ideas about economic theory. The first was ‘perpetualism’, that it is good for all time; if minimum wage hikes reduce employment now, that will always have been the case and will always be the case, ceteris paribus. The second was ‘cosmopolitanism’, that it holds for all places; if minimum wage hikes reduce the quantity of labor bought in the United States, they will do so everywhere, ceteris paribus.

The impacts of minimum wage hikes on small businesses in the United States

A while back I wrote about a report by Minnesota’s Citizens League which investigated the likely impacts of hiking St. Paul’s minimum wage to $15 an hour. It found that most of St. Paul’s large employers such as Allina Health, Ecolab, HealthPartners, and Securian already pay the majority of their workers at least $15 per hour. Two other large employers, U.S. Bank and Wells Fargo, had announced that they would soon be raising their minimum wage to $15 for all employees. The employers who would be impacted by a $15 minimum wage are nonprofits and franchise and small businesses.

Other recent research confirms these findings. In a paper titled ‘Does a One-Size-Fits-All Minimum Wage Cause Financial Stress for Small Businesses?‘, economists Sudheer Chava, Alexander Oettl, and Manpreet Singh find that:

…increases in the federal minimum wage worsen the financial health of small businesses in the affected states. Small, young, labor-intensive, minimum-wage sensitive establishments located in the states bound to the federal minimum wage and those located in competitive and low-income areas experience higher financial stress. Increases in the minimum wage also lead to lower bank credit, higher loan defaults, lower employment, a lower entry and a higher exit rate for small businesses…Our results document some potential costs of a one-size-fits-all nationwide minimum wage, and we highlight how it can have an adverse effect on the financial health of some small businesses.

This reinforces the point that some of the big losers from wage hikes in the Twin Cities will be small businesses.

The impacts of minimum wage hikes on small businesses in the United States

If Haney’s principle of ‘cosmopolitanism’ holds, then the findings of research in America should be replicated elsewhere, ceteris paribus. And new research from Israel supports this.

A new paper from economists Lev Drucker, Katya Mazirov, and David Neumark notes that:

Existing research on the minimum wage focuses on the impact on affected workers, but is silent on the incomes of the owners of businesses who pay for a higher minimum wage. Higher minimum wages will do more to redistribute income if the owners of businesses who pay the higher minimum are at the top of the income distribution, and conversely if minimum wage employers have relatively low incomes, the redistributional effects are weakened.

Using “a unique administrative dataset on the universe of tax records for Israel, in the period surrounding a large minimum wage increase”, the authors find that:

…the minimum wage hike reduced profits of companies, with minimum-wage intensive companies bearing the bulk of the cost and adjusting their workforces more aggressively, and profits declining more for lower-income business owners. Moreover, owners of businesses with higher shares of minimum-wage workers ranked at the bottom of the income distribution of business owners, and their incomes were comparable to those of mid-to-high level workers. In most cases, spouses of business owners earn less than the owners while spouses of minimum-wage workers earn more, further reducing the redistributive effect of the minimum wage increase.

As I’ve written before, when people claim that minimum wage hikes “put the needs of working people above the profit margins of big business” they are living in fantasyland:

It is a land where greedy capitalists, probably in top hats and smoking cigars, ruthlessly exploit downtrodden workers. It is the land of the Robber Barons. It is not Saint Paul in 2018. 

Neither, it seems, is it Israel.

John Phelan is an economist at the Center of the American Experiment. 

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