Proposals to raise the minimum wage are frequently accompanied by concerns that independent businesses may be particularly vulnerable to higher labour costs. A new study, “Who’s Afraid of the Minimum Wage? Measuring the Impacts on Independent Businesses Using Matched U.S. Tax Returns,” takes a closer look at this assumption by examining how small and medium-sized firms adjust to wage increases across both product and labour market dimensions. The findings suggest that while firms respond in different ways depending on their size, most are able to adapt effectively, and the overall impact on workers is largely positive.

Conducted by researchers at Carnegie Mellon University and the University of Michigan and published in The Quarterly Journal of Economics, the study contributes to an ongoing policy debate about the real-world consequences of raising wage floors. It builds on a growing body of research suggesting that minimum wage increases do not necessarily lead to widespread job losses, particularly in the short term.

“Although recent research has found that minimum wage increases have had few harmful effects on employment in the short run, fears persist that independent businesses operate on margins too slim to absorb cost increases or face demand too elastic to pass those costs on to consumers,” explains Max Risch, Assistant Professor of Accounting at Carnegie Mellon’s Tepper School of Business and a coauthor of the study. These concerns have often fuelled calls for small business exemptions and broader opposition to raising minimum wages. At the same time, survey evidence shows that independent business owners themselves are divided, with a substantial share expressing support for higher wage floors.

To investigate these dynamics, researchers analysed a comprehensive dataset combining U.S. tax records from 2010 to 2019 with state-level minimum wage changes, alongside information on low-earning and younger workers who may be most affected by wage adjustments. The study examined responses from approximately 217,000 firms across a wide range of outcomes, including employment levels, worker compensation, spending on non-labour inputs, revenues, profits, and patterns of firm entry and exit.

The results indicate that firms in industries most exposed to minimum wage increases, particularly restaurants and retail, generally did not respond by laying off workers. Instead, they made more modest adjustments, such as slightly reducing part-time hiring. Notably, these firms were able to offset higher labour costs through increased revenues, leaving average owner profits largely unchanged. At the same time, higher wage floors did appear to slow the entry of new firms, especially those that were less productive, leading to a modest reduction—around 2 per cent—in the number of independent businesses operating in these sectors. However, rather than shrinking overall, these industries evolved, with stronger, more productive firms continuing to operate and new entrants reflecting a higher level of efficiency.

From the perspective of workers, the findings are broadly encouraging. Average earnings rose significantly following minimum wage increases, without a corresponding decline in overall employment. In fact, worker transitions suggest improved retention, as employees were more likely to remain in their positions. Some reallocation did occur, with workers moving from independent firms to larger corporations, which helped to offset reduced hiring among smaller businesses. “Amid limited understanding of how markets adjust to accommodate wage hikes, our study offers a comprehensive examination of this issue,” says Nirupama L. Rao of the University of Michigan’s Ross School of Business. “Contrary to concerns that such wage increases might imperil small firms, independent businesses demonstrate a notable capacity to adapt.”

More information: Nirupama L Rao et al, Who’s Afraid of the Minimum Wage? Measuring the Impacts on Independent Businesses Using Matched U.S. Tax Returns, The Quarterly Journal of Economics. DOI: 10.1093/qje/qjaf053

Journal information: The Quarterly Journal of Economics Provided by Carnegie Mellon University