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Minimum Wage Increases in 2022: Piling on Small Businesses at the Worst Possible Time

By at 12 January, 2022, 12:19 am

by Raymond J. Keating –

The minimum wage is one of very few issues where most economists are in agreement, specifically, that an increased minimum wage mandate by government leads to reduced job opportunities for certain groups of workers, and increased costs for labor-intensive businesses, with small businesses getting hit hardest.

While the push persists for an increase in the federal minimum wage, which currently stands at $7.25, many state and local governments have been regularly imposing increased minimum wage mandates.

Consider that at the start of 2022, increases have been imposed at the state level in 21 states:

States Imposing a Higher Minimum Wage at the Start of 2022

State Jan. 2022    2021
Arizona $12.80    $12.15
California $15.00    $14.00
Colorado $12.56    $12.32
Delaware $10.50    $9.25
Illinois $12.00    $11.00
Maine $12.75    $12.15
Maryland $12.50    $11.75
Massachusetts $14.25    $13.50
Michigan $9.87    $9.65
Minnesota $10.33    $10.08
Missouri $11.15    $10.30
Montana $9.20    $8.75
New Jersey $13.00    $12.00
New Mexico $11.50    $10.50
New York $13.20    $12.50
Ohio $9.30    $8.80
Rhode Island $12.25    $11.50
South Dakota $9.95    $9.45
Vermont $12.55    $11.75
Virginia $11.00    $9.50
Washington $14.49    $13.69

 

For good measure, the National Employment Law Project has noted that 35 counties and cities across the country also are imposing increased local minimum wage mandates.

The economic ills of the minimum wage are straightforward, as SBE Council has noted many times before.

First, a higher government-imposed minimum wage reduces job opportunities for low-skilled, young, and/or inexperienced workers. Various jobs are priced out of the marketplace, with those positions being terminated, and the tasks either automated, shifted to other workers, or eliminated altogether. While the minimum wage is supposed to help low-income workers, it winds up hurting them via reduced job opportunities.

Second, costs rise for businesses. That can mean that the relative costs of automation become more favorable compared to more labor-intensive operations.  For other businesses that are highly labor intensive – especially, small enterprises – the increased costs can force reductions in other areas, such as in investments in businesses, in other forms of compensation, in hiring other employees, and/or in profits.

Third, mandated wage hikes can lead to business closure. For small businesses operating on tight margins, especially in difficult economic times, a mandated minimum wage increase can lead to those enterprises simply closing.

And fourth, higher prices. An increase in the minimum wage, under certain circumstances, can generate increased prices for consumers.

A government-mandated minimum wage increase misses the economic fact that labor compensation ultimately is linked to productivity and value brought to the market. Hence, people make investments in education, training and skills in order to boost their productivity and value in the market, and therefore, increase their earnings.

Government stepping in and trying to overrule such economic realities via a minimum wage increase inevitably leads to negative consequences.

The arguments that advocates for increases in the minimum wage attempt to make at least utilize some economic terms, but they do so in misleading ways. For example, it often is asserted that the minimum wage has failed to keep up with inflation, that is, the real minimum wage has fallen. In response, given that a government-imposed minimum wage is detached from the aforementioned economic realities, and inflict an assortment of costs, this argument is largely irrelevant. But if we accept it for some reason, then it turns out that since it was first imposed in 1938, today’s federal minimum wage of $7.25 actually runs far ahead a minimum wage adjusted for inflation from the start, which would register $4.93 in 2021 dollars.

Therefore, the inflation argument would not work in favor of a minimum wage increased to $15 or beyond, but instead, it would point to a reduction in the minimum wage to, well, $4.93.

In addition, advocates attempt to work productivity growth into their arguments. That is, they assert that the minimum wage has failed to keep up the economy-wide increase in labor productivity. Indeed, the Employment Policy Institute makes this argument, and asserts that based on productivity growth, the minimum wage should be more than $22 per hour.

Of course, the absurdity here is that economy-wide measures of productivity have no relationship to the productivity of individual workers. And by definition, the individuals being paid something at or near the minimum wage rank among the economy’s least productive. Again, these are young, inexperienced, and/or low-skilled workers who need work experience in order to improve their productivity – that is, enhance their skills and value to others in the marketplace – which in turn leads to increases in compensation.

No matter how it is dressed up by politics, government-mandated minimum wage increases wind up hurting those who such measures are supposed to help – that is, young, inexperienced, low-skilled workers – by reducing opportunity, and inflicting harm on the small businesses who do the bulk of the job-creating and hiring that workers need.

A higher minimum wage is a clear lose-lose economic policy measure.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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