The Impact of Minimum Wage Increases on Small Firms

Using new data matching the universe of U.S. tax returns of pass-through firms and their workers over a 15-year period, the paper presented in this ZEW Research Seminar examines the impact of higher state minimum wages on small businesses. The authors find that while higher minimum wages have little impact on the average small business, raising wage floors reduces employment by nearly two workers per firm among highly exposed industries where the average firm employs roughly 38 workers. These employment losses, however, are fully concentrated among workers earning less than $4,000 per year. Teenage employees account for the bulk of employment reductions, though employment of workers ages 36 to 49 also declines to a lesser extent. Estimated elasticities of approximately 0.2 are flat across industries and similar to estimates from the literature. Minimum wages sharply increase wage bills in industries that rely on minimum wage workers, substantially redistributing compensation toward the bottom of firm wage distributions. Firms in all industries are able to at least partly offset the cost increases of the minimum wage through higher revenues. Comparing affected industries the authors find that industries where low earning workers compose a large share of variable costs and revenues rose less dramatically reduced employment.