Minimum wage hikes: The nail in the coffin for small businesses

Most state legislatures are kicking off 2021 focused on economic matters after a highly tumultuous 2020.  Every state in the union experienced a shortfall in 2020 tax revenues due to the pandemic.  Although some states fared better than others, lockdowns wreaked havoc and economic devastation that continues to this day.

Americans desperately hope that in 2021, lockdowns will be lifted.  Americans also hope the new year will bring better economic times and opportunities.

Therefore, it is unsurprising that some lawmakers are flippantly considering implementing minimum wage increases in a misguided attempt to provide relief to their struggling constituencies.

However, this is a deeply ineffective way to improve the economy.  Arbitrary minimum wage hikes produce unintended consequences that can inflict even more pain upon the people they are supposed to benefit.

Minimum wage hikes rarely meet the overinflated expectations of the policymakers who advocate for them.  For example, they do not raise the living standard in any appreciable way for individuals and families, yet illogical wage increases have the propensity to shutter small businesses for good.

A recent study by the Congressional Budget Office, titled "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage," examines how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would adversely affect employment and family outcomes.

According to the study, a $15-per-hour minimum wage would boost the wages of 17 million workers.  However, it would also push 1.3 million workers out of a job.  In almost every scenario, minimum wage hikes result in some workers seeing their wages rise, while many more lose gainful employment.

Minimum wage hikes have a myriad of harmful unintended consequences to all businesses, especially small businesses, the backbone of the American economy.  Minimum wage increases in any state would force businesses to reallocate their costs to cover the increase in employees' wages, ultimately forcing them to alter spending elsewhere to offset their newly increased labor costs.

More times than not, this results in less job creation, a reduction in work hours for those lucky enough to remain employed, and higher prices for consumers.  Because most small businesses operate on slim margins, doubling their labor costs with the swipe of a pen will force them to make drastic changes to stay in operation.

And because failed businesses don't pay property taxes, income taxes, sales and use taxes, and the dozens of other licensing and regulatory fees that governments rely on for revenue, increasing the minimum wage will have effects on government revenue.  While seemingly politically popular, the downstream effects of a minimum wage increase will certainly create challenges for municipal and state budgets.

Minimum wage hikes are never a viable economic solution.  Furthermore, given the struggles of small businesses over the past year, a minimum wage hike in 2021 could not be more ill timed.  In an analysis based on self-recorded closures in their database, Yelp estimates that 60 percent of U.S. businesses that have closed since the start of the COVID-19 pandemic have shut down permanently.

Despite this, out-of-touch lawmakers in more than 20 states have proposed reckless minimum wage increases since the start of the year, according to the Congressional Review Service.  In addition, wages also increased in 32 cities and counties, according to the National Employment Law Project

It is disingenuous and disappointing for lawmakers across the nation to push minimum wage hikes, which result in businesses closing and increased unemployment, especially when unemployment has skyrocketed due to the ongoing pandemic.

According to a brief published by the Congressional Research Service, the unemployment rate has reached catastrophic levels unseen in decades.  Even more worrisome, U.S. labor participation has fallen precipitously since the onset of the pandemic.

Although attempts to bolster a minimum standard of living and protecting low-skilled workers in a pandemic world are laudable, the overall economic effects of proposed minimum wage hikes will do more harm than good in a time when every state cannot afford additional economic hardship.  As such, legislators should consider all of the economic and social harm that arbitrary minimum wage hikes bring about and socially distance themselves from the idea altogether.

Samantha Fillmore (sfillmore@heartland.org) is a government relations manager at The Heartland Institute.

Image: Alpha Stock Images.