UC study finds higher minimum wage may help small businesses

Governments raising the minimum wage may actually benefit small businesses and generally do not result in job reductions, according to a study co-authored by a UC Berkeley economist.

The study, according to Michael Reich, chair of UC Berkeley’s Center on Wage and Employment Dynamics, is the first to examine the impact of higher minimum wages on small, low-wage businesses such as restaurants, grocery and retail stores, and child-care operations.

“A minimum wage increase doesn’t kill jobs,” Reich said. “It kills job vacancies, not jobs. The higher wage makes it easier to recruit workers and retain them. Turnover rates go down. Other research shows that those workers are likely to be a little more productive as well.”

The last time the federal minimum wage was increased was 2009 when it was raised from $6.55 per hour to $7.25 per hour. Some states such as California have in recent years raised minimum wages to $15.50 per hour.

The study — co-authored by Reich and Belgian economist Jesse Wursten — found that smaller, low-wage employers can pass the costs of minimum wage increases on to consumers with little negative impact.

Researchers used statistical methods and U.S. Census employer data from 1990 to 2019 to examine the effect of some 550 changes in federal and state minimum wage policy to the labor market, according to the university.

The paper explores small, medium and large U.S. businesses that comprise the low-wage economy — 36% of minimumwage employment is at restaurants, grocery and general merchandise stores.

The result, Reich said, is that higher wages benefit almost everyone.

The study also examined the effect of higher minimum wage on teen employment, finding that higher wages often allowed teenage employees to work less and study more.

“We worked on this new paper because we continually heard that small businesses are especially vulnerable to higher minimum wages,” Reich said. “I heard that from a prominent member of the U.S. House of Representatives when I testified at a hearing in 2019. I’ve heard it from the National Federation of Independent Businesses many, many times. For some people it’s a given — but it’s not supported by the evidence.”

Reich and Wursten also found that higher wages led to lower employment only among high school age workers in small businesses and that the effects are magnified by the college financial-aid programs that incentivize good grades in high school.

“Given the many benefits of educational attainment, the long-term impact on teens substituting time studying for time working in the labor market should be considered a benefit, not a cost, of minimum-wage policies,” the study said.