Minimum-Wage Debate Continues

New study shows decline in firms' profits.

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One of the fiercest debates affecting small business in recent years has been about the minimum wage. Congress upped the federal minimum wage last year, following several increases on the state level.

Some of the most prominent small-business advocacy groups, including the National Small Business Association (.pdf) and the National Federation of Independent Businesses, have protested minimum-wage increases, saying they do economic harm to small firms. A common response from minimum-wage supporters is that higher wages mean more money in the hands of consumers, which in turn means more consumer spending and thus more revenue for employers.

A study that just came out from the National Bureau of Economic Research provides some evidence to think that even if that process does occur, it's not very significant. It concludes that small firms (as well as other firms) really do take a hit in profits overall when you raise the minimum wage:

We report evidence showing that firm profitability was significantly reduced (and wages significantly raised) by the minimum wage introduction. This emerges from separate analyses of two distinct types of firm level panel data (one on firms in a very low wage sector, UK residential care homes, and a second on firms across all sectors).

Three caveats:

1. The study looked only at firms in the United Kingdom, so we should not jump to immediate conclusions that the results necessarily hold true in the United States, although they are somewhat telling.

2. The authors note in the conclusion that they could not find evidence that the lost profits caused any firms to drop out of the market completely.

3. Reduced profits don't mean a higher minimum wage is necessarily a bad idea. But the benefit of higher wages for employees needs to be weighed against other trade-offs.


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