Can Small Businesses Afford a Living Wage?
Concerns and outcomes around raising pay
Last week I published “A $15 Minimum Wage Won’t Cut It”. The one comment I received was a criticism that relied on two arguments: One — not all jobs are worth a “middle-class income”. Two — small businesses would collapse if required to pay minimum wage. Those are pretty typical arguments against raising the minimum wage. Let’s take a close look at the second objection.
Small businesses are under a lot of strain these days. Some industries have been hit particularly hard: local restaurants, entertainment companies, and non-grocery retailers. They are hurting. Some estimates say 31% of small businesses have temporarily or permanently shuttered due to COVID-19. Others are hanging on by a hair. If they are required to suddenly pay higher wages to their employees before they recover from this recession, they are going not going to survive.
However, there are a number of programs under consideration to help small businesses rebound from this. And minimum wage increases are generally rolled out in a phased manner over two to five years.
Additionally, the government often rolls out very different requirements for businesses with fewer than 50 employees than it does for other employers, despite categorizing any business with fewer than 500 employees as “small.” In other words, it has historically distinguished between small and very small businesses. Rolling out living wage standards could, and should, be handled the same way.
Why do small businesses deserve special consideration?
Small businesses are still the backbone of America. They employ over 48% of US workers. They create more new jobs than mega-corporations. They also tend to be more innovative, and more in tune with local needs. In other words, if America wants to recover from the recession, it will need to protect and invest in local businesses.
The vast majority of small businesses (23 million) do not employ anyone; they are a sole proprietorship or a partnership. The next largest category is very small companies (5.1 million). Companies with between 21 and 500 employees comprise a smaller group, with only 611 thousand or so members. Companies in this last group are fairly stable with upward momentum.
However, even the very small businesses are not always low budget businesses. And for many businesses, low wage worker’s salaries constitute a small percentage of their expenses. For instance, most law firms (even relatively prestigious ones) qualify as small businesses. Their expenses include offices, attorney salaries, insurance, software, and, way down at the bottom, paralegal and secretary salaries. Innovative IT firms may also be small businesses. They often employ fewer than 500 people. But they also usually have some of the best-paid professionals in the country. Living wage laws would not be likely to have a huge impact on their operations.
The companies that would be hit hardest by living wage laws are service industries and retail. While there were 5.1 Million very small businesses in this nation in 2013, retail made up 595,280, food service made up 397,330, and other services made up another 626,850. In other words, about a little over a quarter of very small businesses are actually low wage businesses. That is a substantial percentage, but also a clear minority.
However, this minority of businesses employs a large number of otherwise “unemployable” people: people without high school degrees, people with disabilities that make it hard for them to work consistent hours, people with criminal backgrounds, etc. These businesses also often offer a starting place for all sorts of workers. The local restaurant is likely where someone gets their first job as a teenager. A mom with little work experience who wants to re-enter the workforce might find work at a cleaning service or as a shop assistant for a family friend. These small service and retail businesses form an important bottom rung on the ladder of earning and wealth.
Special Considerations in the Past
The question that is hotly debated among policymakers and economists is this: How do you protect the existence of these “first rung” jobs at small businesses while also ensuring that the jobs pay enough to provide a basic level of financial security?
One of the recent bills that affected payroll costs was the ACA. This required that employers pay for minimum health care coverage for their employees or pay a tax penalty. In rolling this out, however, the government built in a large exception: Employers with fewer than 50 FTE (full-time equivalent) employees were exempt. Employees could instead buy their coverage on the facilitated marketplaces. This allowed for relatively even health care coverage while protecting small businesses.
Similar provisions were made with the Family and Medical Leave Act (FMLA). Private-sector employers with fewer than 50 employees are generally exempt. Additionally, FMLA only applies to employees who have been employed by the company for 12 months before the leave would start, and have worked at least 1,250 hours during that period. This is an important note because it means that only 56% of the US workforce can technically qualify for FMLA.
Additionally, current federal minimum wage laws only apply to businesses with annual gross sales above $500K, assuming the business doesn’t operate across state lines. There is a further provision that employers may pay a lower wage ($4.25 per hour) to anyone under 20 years of age during the first 90 days of their employment, and 6.16 per hour at certain industries to full-time students. Additionally, food service and any “tipped wage” employers are only required to pay $2.13 per hour IF the tips push the total earnings above minimum wage. State laws vary on these points, but often do include a training wage exemption to those under a certain age or to those who are current students.
If you are someone who cares about fairness, you will notice that the exemptions in favor of small businesses have left many workers out in the cold. Without FMLA, employees of small businesses struggle to care for their families while maintaining job security. Many other employees end up working below minimum wage, trying to cobble together a living off of multiple jobs, none of which pay enough.
Possible Measures to Ease the Transition for Small Businesses
These cases illustrate important precedents and considerations for laws that affect payroll. The federal government has bent over backward to make labor cheap for small businesses. Where the government has stepped in to provide those benefits directly, bottom rung employees benefit. Where the rules encourage teenage employment, teenagers benefit. However, the rules have also created a tiered employment system that makes it difficult for small businesses to hire and retain an equal level of talent.
If rolling out a living wage system, the federal government could keep the small business exemption. However, while it is legal for very small businesses to pay less than the minimum wage now, employers don’t usually find it advantageous. It is simply too difficult to hire quality employees at rock bottom wages when bigger employers will pay more.
Delayed implementation of increases in wages for small businesses would likely be more beneficial. If their wage requirements lagged behind larger businesses by a year, then the business might be able to raise prices on goods or services according to the increased cash flow in the economy before they needed to start paying their own employees more.
(And no, this increase in the price of goods would not erase the gains made by the minimum wage increase, but that’s a discussion for a different place.)
Additionally, the government could consider adding in a “benefits accrued grant” for small businesses. If, for instance, a business has been paying a combination of tipped wage and a minimum wage that has left 70% of its employees dependent on government handouts, then the government might take the value of those benefits, and give it back as a payroll grant to employers who retain those employees while raising wages. The government would break even. Small businesses would experience a smooth transition. Employees would experience greater job and life satisfaction because they would feel they were earning their way instead of depending on handouts.
Would the Increased Wages Ultimately Hurt Small Businesses?
While many people argue that higher wage requirements hurt small business growth, observed evidence contradicts this. Cities that have increased their minimum wage have experienced job growth over the next year. States that have increased their minimum wages have had higher small business growth than states that have not. Business executives recognize this. Over 80% are in favor of raising the minimum wage.
While wages are a substantial cost to employers, most employers want to do what is right by their employees. They recognize that their success depends on their team. They often feel that their small teams are their family, and they want to take care of their family. However, they are also driven to keep their prices competitive with the market. When minimum wages are increased, they have the opportunity to pay their employees what they deserve.
When wages go up, the amount that people can spend also goes up. That ends up driving more revenue to small businesses, even if the businesses have to raise their prices to recoup some of the additional labor costs.
The transition to a higher wage can be a tricky time period for everyone, but the outcome is beneficial to all. When all is said and done, a living wage would help small businesses.
