The debate of an increase in the federal minimum wage has emerged as one of the more controversial elements of the proposed $1.9 trillion covid relief package. Both President Biden’s American Rescue Plan and the reintroduced Raise the Wage Act would gradually lift the federal minimum wage from $7.25 to $15. The federal minimum wage has been the same since 2009.

What is The Raise the Wage Act?

The Raise the Wage Act would increase the federal minimum wage gradually resulting in $15/hour by 2025. The increase in minimum wage would impact nearly 32 million Americans, a majority who were categorized as essential workers throughout the pandemic. The raise in minimum wage would take place over the next 5 years, in the following increments:

  • 2021: $7.25 to $9.50
  • 2022: $9.50 to $11.00
  • 2023: $11.00 to $12.50
  • 2024 $12.50 to $14.00
  • 2025 $14.00 to $15.00

Supporters of the proposed legislation have stated their goal is to reward essential workers, lift workers out of poverty, reduce racial and gender inequality, and accelerate our economic recovery due to the pandemic.

The Continued COVID-19 Implications on Small Business

Small businesses have become extremely vulnerable in the wake of the covid-19 pandemic. The sectors most affected by the coronavirus, and the least financially resilient, include 1.7 million small businesses who employ 20 million workers and earn 12% of US small business revenue. The continuation of lockdowns will affect these sectors disproportionately and put them at risk for permanent closure.

Will an Increase in Minimum Wage Affect My Small Business?

The Potential Negative Ramifications of an Increased Federal Minimum Wage

For some small business owners, already battered by pandemic shutdowns and the economic downturn, more than doubling the minimum wage will increase expenses, lead to layoffs, and potentially shutter more businesses. According to a recent survey released by the National Federation of Independent Business (NFIB) Research Center, 74 percent of small business owners say increasing the federal minimum wage would negatively impact their business. 

The risk of a wage increase is that it will be set too far above the hourly rate employers can afford to pay their employees, forcing them to lay off workers if they cant offset that cost in some other way. Small businesses typically have smaller profit margins and fewer ways to reallocate funds if their expenses significantly increase, which doubling the minimum wage will do. Along with job loss, opponents of a rise in federal minimum wage believe it could lead to inflation and make companies less competitive.

The Potential Positive Impacts of an Increased Federal Minimum Wage

On the other hand, some believe that small businesses could reap benefits from a hike in minimum wage as that may offset the increased payroll costs. A growing number of business owners have recognized the benefits of paying a higher wage to their employees.

Additionally, the increase in low-wage worker’s income helps generate increased spending in the local economy. The workers who would receive this bump in pay are likely to inject it into local economies, which directly benefits small and local businesses. A study by the Federal Reserve Bank of Chicago estimates that a $1 raise for a minimum wage worker translates to an additional $2,080 in consumer spending by their household over the course of a year. One industry that would likely get relief from an increase in the federal minimum wage is the restaurant industry, as low-income workers are likely to increase dining spending when they receive a raise.

The Bottom Line:

Although it will be years before we fully understand the economic impact of the coronavirus, one thing is painfully clear right now: Small businesses across the country are facing incredible hardships and existential threat. Businesses with fewer than 500 employees account for 48% of American jobs and 43.5% of GDP. Yet while these smaller firms play an astronomical role in the U.S. economy, theyre often financially fragile, with little cash on hand or resources to buffer even a minor financial shock.

Exemplar Companies Small Business Legal Experts & Small Business Accountants helping Entrepreneurs Navigate Pandemic Uncertainties.

The unfolding complexities of an increased minimum wage along with the other complexities COVID-19 has brought on small businesses owners may have businesses owners feeling exhausted. The good news: Exemplar Companies has a team of small business legal experts and small business accounting experts to help small businesses navigate the ever-changing landscape of the economy and potential increase in minimum wage. Not sure how it would affect your business? Give us a call and we will walk you through how changes could impact your bottom line.

 

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