How raising minimum wage to $15 per hour could affect workers and small businesses

A protester attends a rally held by fast food workers and supporters to celebrate the California Labor Commissioner’s order for the company to rehire and compensate workers who went on strike for coronavirus disease (COVID-19) protections, in Los Angeles, California, February 18, 2021.
Lucy Nicholson | Reuters

The debate over raising the minimum wage is gaining steam, as lawmakers on both sides of the aisle weigh the benefits and consequences of boosting the lowest pay to $15 per hour. 

"We want to see Americans' wages go up, we want to see more jobs created — not fewer — and we want to see businesses thrive, especially small businesses that are the backbone of our economy," Rep. Dean Phillips, D-Minn., said Wednesday during a hearing called by the House Committee on Small Business

Late last month, Democrats introduced the Raise the Wage Act of 2021, which would gradually increase the federal minimum wage from $7.25 to $15 by 2025. The legislation is currently included in the House version of the $1.9 trillion relief package that is set for a vote on Friday, but it's unclear if that provision will pass the Senate. 

Another option, announced Tuesday by Senators Mitt Romney, R-Utah, and Tom Cotton, R-Ark., would be to increase the federal minimum wage to $10 per hour by 2025 and then automatically increase it every two years to match the rate of inflation. However, the bill also mandates that employers use e-verify to ensure that businesses are not hiring illegal immigrants. 

About 1.1 million hourly workers earned wages that were at or below the minimum wage last year, according to the Bureau of Labor Statistics. But there are many more millions of workers who earn just above minimum wage. 

Raising the federal minimum wage to $15 per hour would increase wages for 17 million U.S. workers, according to the Congressional Budget Office. Another 10 million additional workers earning slightly above $15 per hour would be affected. 

Meanwhile, the $10 increase proposed by Romney and Cotton would only boost wages for 4.9 million workers, or 3.2% of the workforce, according to a report released Wednesday from the Economic Policy Institute.

Will legislation create another blow for small businesses?

There's no doubt that companies across the world have been dramatically impacted by the Covid-19 pandemic, and that's especially true of small businesses in the U.S. About 53% of companies with less than 50 employees surveyed reported the pandemic has had a moderate to severe impact on their business, according to the CBIZ Main Street Index.

In light of those struggles, some lawmakers feel now is not the time to raise operating costs for businesses. "A federal, nationwide mandate to raise the minimum wage to $15 per hour will put us right back to where we were months ago — American jobs destroyed, small businesses forced to close their doors and life savings gone to waste. I can't think of anything more devastating at a time when our small businesses are barely getting back on their feet," said Rep. Elizabeth Ann Van Duyne, R-TX.

Additionally, many opponents of the $15 minimum wage fear it will lead to job losses and business closures. The CBO report found that the federal minimum wage increase to $15 would reduce employment in the U.S. by 1.4 million, or about 0.9%. 

Yet proponents of the wage increase say that raising the federal minimum to $15 per hour will not only benefit workers, it will actually help small businesses by increasing consumer spending, lowering turnover and spurring better productivity and customer satisfaction.

But the reality can be complicated, as shown by businesses that already pay above the minimum wage. That's the case for St. Paul, Minn.-based pizza chain Punch Pizza, which was acknowledged in former President Barack Obama's 2014 state of the union for paying its employees above minimum wage and currently pays an average of $13 per hour for starting wages. Established employees earn an average of $15 per hour, plus an additional $5 in tips, co-owner John Puckett said Wednesday during the congressional hearing.

Punch Pizza lost over $1 million in revenue last year and will likely continue to lose tens of thousands of dollars a month this winter. "We expect to lose that until we're able to safely reopen our dining rooms," Puckett says. 

While paying employees more than the minimum wage is a priority, it means the company is giving up profit margins in the short-term since labor costs for Punch Pizza are about 40% of sales, Puckett says. And St. Paul is in the process of gradually raising minimum wage to $15 per hour by 2022.

"We're trying to figure it out," Puckett says of the impact of the rising minimum wage on his business. 

In order to combat rising labor costs, Punch Pizza has focused on ways to grow sales, including expanding into takeout during the pandemic. "We've been able to survive with 100% takeout and we think that coming out of the pandemic, we will be able to retain more of that business and hopefully, continue to stay ahead of the minimum wage," Puckett says.  

Unintended consequences for families

Although increasing the minimum wage would potentially create more spending power for low-income Americans, it would also raise the costs of child care by an average of 21% in the U.S., a new Heritage Foundation study finds. It would add an extra expense of $3,728 per year for a family with two children due to the increased labor costs, the study finds.

The average early childhood worker earned $11.65 an hour in 2019, according to a recent report from the Center for the Study of Child Care Employment at the University of California, Berkeley.

"One of the biggest impacts [of the $15 minimum wage] is going to be child-care costs," Rachel Greszler, a research fellow in economics, budget and entitlements at the right-leaning Heritage Foundation, said Wednesday. 

"For single mothers, it's not an option whether or not to work, and yet [they would] be facing thousands of dollars more in child-care costs per year. That's going to put these women in a bind," Greszler says. 

Who benefits from a higher minimum wage? 

One of the arguments against raising the federal minimum wage is that many of the workers earning $7.25 are part-time teens and college students earning spending money through a side job. 

It's true; many of the employees who are earning at or below the federal minimum wage of $7.25 per hour are younger. Prior to the pandemic, about 3.8% of hourly workers between the ages 16 and 24 earned $7.25, compared to 1% of workers over the age of 25, according to the BLS

Yet it's "profoundly wrong" to characterize the minimum wage increase to $15 per hour as only benefitting teenagers, says Heidi Shierholz, a senior economist and director of policy at the left-leaning Economic Policy Institute. 

That's because there are many full-time, adult hourly employees who are earning just above the minimum wage, but still earning less than $15 per hour. Only about 1 in 10 of those who would benefit from a $15 minimum wage are teenagers, Shierholz says. 

In fact, EPI's research shows that more than half of those who would benefit from a $15 federal minimum wage are workers between 25 and 54, the majority of whom are women. Over a quarter of those workers have children. 

"Raising the minimum wage is long overdue. Workers today who are paid the current federal minimum wage are paid more 30% less in inflation-adjusted terms than their counterparts were paid 53 years ago," Shierholz says.

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