Water dropIf you watched or listened to our president’s State of the Union, you heard him mention raising the minimum wage to something “you can live on” – $9.00/hr, up from $7.25, an increase of 24%. His statement has raised quite a hullabaloo of late, with staunch and persuasive supporters on either side.  So – what impact will such a raise have on both employment and small businesses?

A comprehensive paper by John Schmitt entitled “Why Does the Minimum Wage Have No Discernible Effect on Employment?” (pdf) distills major economic studies on minimun wage since 2000 and concludes “[t]he weight of that evidence points to little or no employment  response to modest increases in the minimum wage” when balanced against other factors. One of the most interesting points the report mentions is that increases in minimum wage are often insignificant compared to other unexpected costs businesses must absorb on a yearly basis.

There are a number of arguments proferred in favour of a rise in the minimum wage. Most of them fail but some fail harder than others,” writes Tim Worstall for Forbes. The idea that paying employees higher wages reduces turnover – reducing business costs – is bunk, he says. The whole Henry Ford $5 a day deal? Since Ford paid “higher wages than his competitors he was able to reduce turnover rates and thus reduce training costs.” “Higher” is the operative word here: had minimum wage been $5 a day, Ford’s turnover would have been average.

Say it’s increased to $9, minimum wage “is still well below today’s living wage in most states,” says Yves Smith on nakedcapitalism.com. Furthermore, she points to evidence that minimum wage workers whose salaries are increased are likely to borrow more (i.e. make large purchases that must be funded) “with car loans the biggest component of the increase.” Also, she cites studies that found pay for “[minimum] wage workers rose but not the pay of the workers who were above the bottom strata, which is not surprising.” Bottom line: When those making minimum wage get raises,”[t]hey go into debt,” thus benefiting the economy.

“If raising the minimum wage is good economic policy, why stop at $9 per hour?”  writes Keith Hennessey, laying on a heavy dose of sarcasm. “Why not increase it to $90 per hour?” Since the president seems to believe that putting more money in consumers’ pockets is a good thing, why don’t we increase their buying power further? Increasing minimum wage would surely increase unemployment, since “[a] minimum wage increase precludes employers from hiring, or from continuing to employ, those workers whose productive value to the firm is worth less than the new minimum wage.”

Should minimum wage be increased? What impact would it have on your business?

[cc image credit H de Smet]