The minimum wage is widely debated in the U.S. Proponents make the case that the minimum wage helps the lowest earners, while opponents claim that the minimum wage destroys jobs by forcing businesses to slow or eliminate hiring in order to comply.
Small business owners generally hate increased regulation. It’s a top complaint (along with taxes) on survey after survey of small business owners, year in and year out. So as the minimum wage debate starts to heat up again this year, we compiled a guide to understanding the minimum wage debate and how it could impact your business, your employees and your bottom line.
What Is the Minimum Wage in the U.S.?
The minimum wage, simply put, is a price floor for which American workers can sell their labor to American employers. Minimum wage laws date back to the late 1800s/early 1900s, when political grassroots movements first argued that the average American worker was not making enough to live above the poverty line.
After a couple failed attempts to establish a federal minimum wage in the U.S., the Fair Labor Standards Act (FLSA) created the first U.S. minimum wage in 1938, set at 25 cents per hour. This wage has since been increased over 20 times by Congress. Many states opt to establish their own price floor that is higher than the federal guidelines, but cannot in any fashion be lower than the federal guidelines.
What Is the Minimum Wage for Your Business?
As of July 2016, the federal minimum wage is $7.25 an hour. For employees that can also accept tips, the federal price floor is $2.13 an hour.
There are several states that have price floors above this metric. The highest state minimum wage sits at $11 in Massachusetts and Washington, however counties or cities can create their own “living wage” that sets the minimum wage above that of their state. In Emeryville, Calif., for example, the minimum wage is $15.20 for firms with 56 or more employees, yet the state minimum wage for that same group of firms is just $10.50.
As an employer, you should know the minimum wage and overtime pay laws for your state, city, county and the size of your firm. Only have salaried employees on staff? You’ll still need to pay at or above the minimum wage — so the total amount you’re paying them divided by the total number of hours they work must still meet the minimum wage.
Are All Employers Required to Pay the Minimum Wage?
Employer firms with gross annual sales over $500,000 are required to pay the minimum wage, as well as smaller businesses that engage in interstate commerce, whether that be selling across state lines or engaging in regular communication across state borders.
Increasing the Minimum Wage: The Arguments
Opponents of Increasing the Minimum Wage
Opponents of increasing the minimum wage believe that the federal government should take a step back and allow the market to determine the price floors for individuals on a wider scale. Here are some of the negative consequences that opponents believe will occur if the minimum wage is increased:
- Job losses might increase due to employers choosing not to hire lower-skilled workers.
- Teenagers and other low-skilled workers might be shut out of the workforce altogether.
- Poverty might increase due to low-skilled workers having a harder time finding employment.
- Upward mobility will decrease because low-skilled workers will not be able to build skills.
- Businesses with low profit margins might be forced to close due to the higher labor costs.
- Employee benefits might be reduced to go towards paying for the higher labor costs.
- Consumer prices might increase due to employers passing on the higher labor costs to customers.
- The adoption rate to robots and automated technologies will speed up, replacing these jobs entirely.
- Finally, there could be a rise in outsourced jobs to countries where labor is cheaper and employees aren’t subject to the U.S. federal minimum wage.
Advocates of a Minimum Wage Increase
Those that favor a minimum wage increase believe that the minimum wage has not kept up with the pace of inflation and increasing the minimum wage would help to stimulate the economy. Here are some of the positive effects that advocates believe will occur should the minimum wage be increased:
- The number of Americans in poverty will drop by allowing low-skilled workers to afford housing, food and other items.
- There will be a reduction in crime, increase in high school attendance and decrease in dropout rates due to reduced poverty.
- Economic activity will increase as low-skilled workers will have more disposable income to spend.
- With fewer people living in poverty, government welfare spending will drop, which will help reduce the federal deficit/debt.
- An overall reduction in income inequality will occur.
- It will have a ripple effect by also increasing incomes of those who make above minimum wage.
- Worker productivity will increase and reduce employee turnover.
How Can You Prepare Your Business for Higher Wage Costs?
While there’s no guarantee there will be a minimum wage hike in the near future — in fact, in the current political climate it’s not likely there will be a hike on the federal level — state or local minimum wage hikes could impact your business in the near future. That, in turn, could impact your cash flow as you deal with increased labor costs, and in the long term could force you to reconsider your overall business plan. Here are some questions to ask yourself:
- How many employees will need to have wages raised?
- Will you need to streamline or eliminate positions to open up budget?
- Do you need to raise prices? (And will that impact your marketing budget or strategy?)
- Do you need to adjust your business plan/projections?
- If this is a local change, should you consider moving your business elsewhere?
- Are there fixed costs you can eliminate now to prepare? For example, should you move to a coworking space and ask some employees to work from home?
This article was originally written on August 9, 2017 and updated on January 27, 2021.