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The Impact of the Minimum Wage Increase for Small Businesses

When the minimum wage hike was announced at the end of October, it brought about many strong reactions from economists and think tanks, including the Employers and Manufacturers Association. The agency expressed concerns that the minimum wage increase is too high, and that it would “bring the economy to a grinding halt.” Economist Eric Crampton, of the free market think tank at the New Zealand Initiative, believes the wage hike will create thousands of lost jobs and millions in lost revenue, insisting that struggling families should be helped through taxpayer subsidies instead of a wage increase.

Following these doubts came more reasonable concerns from retailers, restaurant owners and other small businesses that wondered how they would be able to pay workers $20/hour by April 2021. The wage hike certainly creates many challenges for businesses large and small that rely on minimum wage workers to keep operations running smoothly. While some of these concerns are valid, the results for businesses may not be as bad as they think.

Case Study: Seattle, Washington

In June of 2014, the US city of Seattle opted to raise its minimum wage to $15/hour, the highest minimum hourly wage in the United States at the time. Opponents of the measure cited many of the same concerns related to business profits and the impact on the economy, believing it would create massive price increases for consumers. They said the increase would drive layoffs and result in businesses shutting doors because they wouldn’t be able to cover labour costs.

The University of California-Berkeley’s Institute for Research on Labor and Employment completed a study to analyze the impacts of Seattle’s minimum wage hike, which focused in particular on the food service industry. Their findings were surprising: Employment in food service was not affected. Furthermore, Seattle’s unemployment rate has steadily fallen in the period since the wage increase was introduced, hitting an impressive 2.6 per cent in April 2017.

The study’s findings are encouraging for businesses, as it indicates that maybe the outlook is not so dim after all, and although it may require some adjustment of finances, the Seattle example shows that the wage increase may be somewhat manageable.

What Businesses Are Affected By the Increase?

According to the most recent Minimum Wage Review, around 73,000 workers in New Zealand are on the minimum wage, or about 2.9 per cent of the country’s workforce. All businesses employing workers at minimum hourly rates will be impacted, including:

  • Small businesses
  • Restaurants, chains and independently owned companies
  • Hospitality firms
  • Retail businesses

How to Adjust to the Change

Many businesses may be forced to pass the increase in expense onto the customers. For instance, a cleaning company that now must pay its employees $20/hour could end up raising prices for cleaning services. If the business has a good reputation and a solid client base, customers may be willing to pay more for the service.

Owners of small businesses may end up making lower profits, and may find more efficient production methods as a result if they have fewer workers. If they can’t pass on the increase in cost to consumers, they may need access to capital to cover the costs. However, some economists are expecting a trickle-up phenomenon to occur. As more people have extra money, they are able to infuse cash into the economy, which may offset expenses for some businesses.

The impacts on individual businesses are difficult to predict, but the wage hike will be introduced gradually. The current plan has it rising 75 cents to $16.50/hour in April 2018, and eventually jumping to $20/hour by April 2021. While the full impact of a wage hike remains to be seen, a gradual increase gives businesses time to absorb the costs and adjust finances accordingly.