Myth vs. Fact: The Impact of Minimum Wage And Small Business

There are many myths surrounding the effects of minimum wage rules upon small businesses. Often, you’ll hear some say they “can’t afford” to pay their workers minimum wage or that customers would be happier if all employees were provided a raise in minimum wage. Fortunately, the topic has been the subject of dozens of academic studies in an effort to detect and quantify the impact of minimum wage laws. Let’s dispel some myths about this impact:

Only teens benefit from minimum wages.

False: 88 percent of those who benefit from the minimum wage and any increases in it are at least 20 years old, not teenagers looking for spending money.


Minimum wage laws only affect part-time workers.

False: Full-time workers make up about 53 percent of the minimum wage worker pool.


Increases in the federal minimum wage are automatically tied to inflation.

False: Some states have adopted this practice, but not the federal government. Some in Washington would like to adopt this rule, but the chances seem remote.


Young workers are exempt from the minimum wage laws.

False: The exemption for workers under 20 years old extends for only the first 90 days of consecutive employment within the year.


Raising minimum wage gives small business happier customers.

False: A rise in labor costs will cause job loss or the increase the price of the product/service to the customer. The business owner could take one of these measures to offset his added costs, both of these resulting in less satisfied customers, from understaffing, or increased prices.


Most small business owners do not support the minimum wage.

False: A 2014 survey of business owners found 60 percent support for the minimum wage. Reasons for support included an increase in consumer purchasing power, a boost to the economy, higher productivity and happier customers due to stable employees.


Restaurants would lose out if the minimum wage for tips was increased.

False: California has one of the highest minimum tip wages and its restaurant sales are well above average. San Francisco has one of the highest minimum wages for restaurant workers in the country, but despite (or because of) this, the city’s restaurants have had positive job growth for years.


If workers had higher incomes then poverty would be lowered.

False: Many minimum wage jobs are in competitive sectors of the economy, meaning these businesses are already struggling to remain viable.


Tipped employees are not affected by minimum wage.

False: The sum of wages and tips must equal the minimum wage. If they don’t, employers must make up the difference.


Minimum wage will directly affect the rise or fall of unemployment.

False: Unemployment is variable based on a variety of factors. System Dynamics Modeling (The Field of System Dynamics) suggests that our brains focus in a straight-line causation when thinking about these types of social problems. Instead of increasing the incomes of the poor through legislation, efforts should focus on stimulating demand for labor so that firms pay more by choice.


The federal minimum is too high by historical standards.

False: When evaluating the minimum wage over time, you must take inflation into account. Today, the minimum wage is $7.25 per hour, compared to $3.35 an hour in 1981. However, the current minimum wage would have to exceed $11 an hour to have the same buying power it did in 1981.


Minimum wage employees are stuck at that wage and need a legislated increase to earn a raise.

False: Research shows that the vast majority of employees who start at the minimum wage earn a raise in their first one to 12 months on the job.


It’s quite apparent that the minimum wage laws are good for business, good for workers and good for the economy, it’s just a tricky balancing act. It also allows us to see when minimum wage discussions arise, it is often just a cover for the actual problems at hand, stimulating employment. For this reason, we can all thank our local small business owners for doing just that.

Learn more about what IOU Financial can do for the financial challenges small business owners face on our small business loans page.