How Could Minimum Wage Hikes Affect Your Small Business?

California recently raised its minimum wage to $15 per hour, which has many small-business owners questioning how the minimum wage hike will affect the bottom line.
March 31, 2016

As California recently raised its minimum wage to an eventual $15 an hour over the next several years and other states like New York consider following suit, the wage increase brings up an important question. How might minimum wage hikes affect your small business? It turns out there may be both benefits and drawbacks to paying baseline employees more money.

“The correct level of our minimum wage has always been a hotly debated topic—and for good reason. There are good and bad arguments on both sides,” says Parviz Firouzgar, an entrepreneur, speaker and author of 20/20 Hindsight: If I Knew Then What I Know Now I'd Be A Lot Richer.

“The recently proposed minimum wage hike to $15 per hour in California will not be a sudden jolt to our economy, as it is a gradual hike taking several years to complete,” Firouzgar says. “The fact is that it’s a measure that must take place at some level sooner or later, as the cost of living in California along with standard annual inflation is high.”

Benefits of Minimum Wage Hikes

A minimum wage increase can be beneficial, Firouzgar believes. “Raising the level of income for substantial numbers of people provides more money circulating throughout the economy, which may benefit everyone due to the increased purchasing power of the masses,” he says.

If all small businesses in a community raise the working wage of their employees, the employees in turn have more disposable income, which they can spend to buy products and services from small-business owners.

Apek Mulay, owner of Mulay's Consultancy Services and author of Mass Capitalism: A Blueprint for Economic Revival, agrees: “If all small businesses in a community raise the working wage of their employees, the employees in turn have more disposable income, which they can spend to buy products and services from small-business owners, who then discover that they get back more than what they invested in paying raised wages.”

Though a rise in minimum wage at first may cause some job loss as employers focus on keeping the most valuable employees and letting others go, in the long run it can benefit small business, adds Henry Hutcheson, president of Family Business USA and author of Dirty Little Secrets of Family Business. “After letting some employees go," he explains, "small businesses get a more dedicated quality workforce over time.”

Drawbacks of Minimum Wage Increase

Small businesses may be left with a dilemma when it comes to increasing the minimum wage, Firouzgar notes. “On the downside of controlling the minimum wage at any level is that it is essentially a manipulation of the market where the natural levels of supply and demand should logically dictate hourly wages," he says. "Many small businesses will be forced to cut their labor force or raise their prices, and some will explore automation with robotics.”

In the fast-food industry, an increased minimum wage is already leading to exploration of automation, Firouzgar points out. “This automation has the potential to eliminate thousands of minimum wage workers, which is not something anyone likes to see happen, but it is unavoidable with or without minimum wage increases," he explains. "As our technology progresses and automation becomes an obvious outcome, a minimum wage increase serves to accelerate innovation in this field, as necessity becomes the mother of invention.”

Solution to the Minimum Wage Dilemma

To adjust to the increase in wages and even profit from them, small-business owners may want to consider making some adjustments.

“There is a solution that most small businesses should consider, and it has to do with the value employees provide,” Firouzgar says. “The small-business owner should contemplate how he or she could reposition employees, giving them more responsibilities, in order to increase the value they contribute to the business so that their work is commensurate to the amount they are being paid.”

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