How a Higher Minimum Wage Might Affect Small Business

hundred-dollar-billsMuch of the debate regarding whether or not to raise the minimum wage has centered on what doing so might mean for America’s small businesses. Concerns over whether or not employers at smaller companies could survive a wage increase has caused a considerable stir among economists, low-wage earners, high-wage earners, CEOs and armchair pundits. A recent survey found that over half of all small business owners believe that the minimum wage should increase to $10.10 per hour, and 82 percent of them currently pay their employees above the minimum wage already, but if a raise is actually legally enacted, what challenges — and benefits — might small businesses experience?

Whether you’re about to embark on starting your own business or you’re an hourly employee both excited and nervous about the effects of higher wages, an increase to the minimum wage will have far-reaching effects on just about everybody. As the economy seems to be slowly emerging from its recession slumber, those potential effects have turned the discussion around the minimum wage into a real nail-biter. Here are some of the potential ways that small businesses stand to lose and gain if the federal minimum wage goes up.

Increased Leverage

One of the surprising ways that small business owners stand to benefit — especially if they’re in the 82 percent who already pay their employees above the federal minimum wage — is in the increased leverage and competitive edge it will give them over larger corporations and companies. The overwhelming majority of minimum wage workers are employed by large, profitable companies — not small businesses. This reality means that if larger companies were forced to pay a higher wage to their workers, that increase to their bottom line could potentially level the playing field for smaller companies. Many large businesses are able to out-perform smaller businesses in larger part because they undercut them in labor costs. If that advantage were removed, smaller businesses might actually fare better in the marketplace overall.

Increased Employee Productivity

Well-compensated employees are happier and more productive than employees who are not. One potential benefit from an increase in the minimum wage is that small businesses would actually get more out of their employees, which may actually mean they make more money in the long run. While not all low-wage jobs fit the bill in being able to have much expansion in

productivity, some low-wage jobs are in industries where productivity is king — like fast food service, for example. Selling 1,000 hamburgers in an hour as opposed to 600 will more than make up for the hourly wage hike in most food service scenarios.

Increased Consumer Demand

store-ownerWhen workers make more money, consumer demand increases for goods and services those workers previously could not afford. Higher wages could function like a mini-stimulus, and because small business owners usually live where they work, the extra money that employees in their town and region take home as a result of an increased wage would most likely be spent in their town — maybe even in their business. Increasing consumer demand has been and still is small business’s primary concern, and when people have more money, it goes up.

Overall Wage Increases

Many small business owners are concerned that an increase to the federal minimum wage will require them to increase their wages overall in order to compete for better workers. While most small business owners are paying their workers above the legally mandated $7.25, not all are paying $10.10. If that’s the lowest price at which an employee can work, it doesn’t take long before a small profit margin might disappear. Just paying five full-time employees $2.00 more per hour would be a cost increase of $1600 each month, and some small businesses might be unable to survive that extra cost.

Raising Prices

open-for-business1Another small business owner’s worry regarding being forced to pay higher wages is the fear that prices would have to increase to cover the cost. Anytime prices are raised, there is the potential for backlash from the consumer, and because how much something costs is one of the primary ways that Americans make choices regarding their purchases, it stands to reason that raising prices could hurt business. For many companies, the choice will come down to raising prices or closing their doors.

Only time will tell if an increase to the minimum wage help or hurt small business, but the potential pitfalls and windfalls are waiting in the wings. Given that most small businesses already pay their employees more than they’re legally required to, the odds are pretty good that, when the dust clears, most of them will still be standing.

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Entrepreneur-Resources.net is happy to provide guest posting opportunities for small business owners. This article was created by one of our contributors.

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