To illustrate the flaws of socialist thinking about wealth distribution, legendary free market economist Milton Friedman was fond of telling people that the economy isn’t a pizza, with only so many slices available to be divided fairly among everyone. In reality, Friedman explained, the economy is technically limitless — one person’s having X amount of money does not mean that there is only Y amount of money left over for everyone else.
However, while a pizza may not be totally applicable as a metaphor for the economy as a whole, it is an excellent metaphor for a small business’s operating budget — which is why the proposal to raise the federal minimum wage from $7.25 to $15 an hour will be harmful to small business entrepreneurs and the people they employ.
Proponents of raising the federal minimum wage insist that the current minimum wage is not a “living wage” and is not enough to lift people out of poverty. While everyone would like to see wage earners make more pay, raising the minimum wage would actually push more people into poverty than it would lift out of poverty.
Running a small business costs more money than one can possibly imagine. Small business owners need to pay for utilities, product, advertising, insurance, taxes, and wages, just to name a few things. But business owners only have a limited amount of money to spend on this stuff, an amount that’s tied directly to their revenue.
The government can arbitrarily go ahead and increase the minimum wage, but it can’t wave a magic wand and give small businesses the extra revenue to absorb the cost of that wage hike. So more than DOUBLING the current federal minimum wage will leave small business owners with few choices: increase costs for the customer, cut costs at the product level by going for lower quality, cut the number of employees and the hours they work, or stop doing business altogether. There are only so many slices in a pizza.
This is why it should come as no surprise that a report published in early February by the nonpartisan Congressional Budget Office estimated that the wage increase would come at a cost of 1.4 million jobs, and that “young, less educated people would account for a disproportionate share of those reductions in employment.”
In January, professors David Neumark and Peter Shirley released a study of all the recent literature on the effects of minimum wage increases in the United States. The study found that the research shows “a clear preponderance of negative estimates” on jobs numbers, and that “this evidence is stronger for teens and young adults as well as the less-educated.” Simply put, minimum wage increases are ruled by “the law of unintended consequences,” often taking the jobs of those who need them most.
Minimum wage increases can also be particularly hard on the restaurant industry. According to a NYC Hospitality Alliance survey taken just one month after New York City raised its minimum wage, 36% of restaurants resorted to layoffs and 90% had to increase prices. A year after the wage hike, roughly 77% of its restaurants had cut employee hours. Around 4,000 jobs were lost in New York City’s restaurant industry alone.
In the age of COVID, in which so many small businesses are struggling and have already had to make many tough choices due to the disastrous economic effects of lockdown measures, increasing the minimum wage could be a guaranteed death sentence for many. Now, more than ever, small businesses need the economic freedom — less government intervention and less regulation — to create as many jobs for as many people as possible. Dramatically increasing the federal minimum wage will have the exact opposite effect.