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Does the Minimum Wage Law Stifle Small Business?

written by: Shoshana Jackson•edited by: Michele McDonough•updated: 10/13/2011

Can an increase in minimum wages halt small business growth? There are many disadvantages in increasing the minimum pay rate, especially during these difficult economic times. These disadvantages apply not only to the entrepreneur, but also to the employee.

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    Disadvantages of Minimum Wage Laws

    Increases in the minimum wage can affect labor costs for a small business. Although the increase may give an employee a small boost in income, it will not help the entrepreneur stay afloat during difficult economic times. That additional cost in wages can end up costing an employee a job or an entrepreneur their business.

    During these tough economic times, entrepreneurs are facing rising costs including workers’ compensation premiums, unemployment insurance, and health insurance and increases in federal, state local and industry wide regulations. Entrepreneurs are also dealing with the fact that demand for products and services is down. Any mandatory wage increases could force some businesses to reduce their workforce or implement a hiring freeze.

    The question for many is whether a continual increase in minimum wage will help the poor. This point is widely disputed. As of July 24, 2009, the federal minimum wage for covered nonexempt employees is $7.25 per hour, although this amount can vary from state to state, with most employees being entitled to the higher minimum wage.

    Minimum wages have never been sufficient to lift a person out of poverty, but it can be a starting point. Some low-wage earners may find financial relief from even a slight increase, but not if it means they risk being laid off in the process.

    This is why it’s important to understand the real impact an increase in minimum wage will have on a small business. A constant or steep rise in minimum wage can have a detrimental effect on both the worker and the entrepreneur.

    These are some of the disadvantages of the minimum wage, especially during a difficult economy:

    1. Many minimum wage employees use this income as a supplemental wage. These earners may be teenagers, college students, part-time workers or people who have another source of income. Increases in this minimum wage often cause an employer to lay off these employees or cut their hours in order to reduce costs.
    2. The minimum wage was not intended to be a living wage. For many even with a job, they will still require assistance from federal, state and private agencies. A disadvantage of minimum wage increases is that the opportunity for many poor families to earn an income will be reduced as entrepreneurs stop hiring for these entry-level positions.
    3. Economic mobility is part of the American economic system. Through hard work and education an employee can improve their employment opportunities. These new opportunities can elevate a family’s standard of living and raise them out of poverty. Increases in wages can reduce this chance for economic mobility by limiting the amount of entry-level positions available.
    4. The health of the US economy and small businesses requires that government regulations do not artificially increase the cost of entry-level labor. Every increase in the cost of hiring low-wage workers provides a reason for employers not to hire, to lay off or automate work in lieu of hiring a new employee.

    During a down economy there are many disadvantages of raising the minimum pay rate. As long as the wage floor is reasonable the best policy is to maintain the pay rate and refrain from instituting a continuous increase which could dampen the benefits it has reaped.

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    Fernando Mengoni from Recommended alternatives to increases in minimum wage in order to ease up the burdens of entrepreneurs include the following:

    • Temporarily suspend minimum wage increases during a recession. Once the economy is doing well, wage increases could be implemented again. The idea here is that receiving low pay is better than no pay at all, especially in tough times.
    • If a minimum wage increase is necessary then entrepreneurs should be allowed to enjoy increases in their income through tax cuts. Tax reliefs for small businesses would be crucial in easing the effects of minimum wage increases.

    If employees receive raises then businesses should be given necessary boosts or respites by the government to ensure their continuous operations. What is beneficial to both employees and employers should be taken into consideration in order to minimize the disadvantages of minimum wage increases.