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The Pros and Cons of Raising the Minimum Wage

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Content was accurate at the time of publication.

The minimum wage is the lowest amount an employer can pay their employee, as mandated by federal law. The current federal minimum wage is $7.25, but the minimum can vary at the state level — for example, New Jersey and Illinois have enacted legislation to increase their minimum wage to $15.

Introduced in January 2021, the Raise the Wage Act of 2021 aims to increase the federal minimum wage to $15 per hour by 2025. If enacted, the pros and cons of raising minimum wage may necessitate changes in how employers conduct business.

Pros of raising the minimum wage

If you look beyond the rising labor costs that a higher minimum wage causes, you could find multiple advantages for businesses that explain why the minimum wage should be raised.

Improves employee retention

Higher wages could help employers retain their workforce because employees have less incentive to seek higher-paying employment elsewhere. Reducing employee turnover could be a boon to a business’s bottom line.

“There are all sorts of cost savings and bottom-line benefits to slowing down turnover and being able to retain employees to the tune of thousands of dollars per employee per year,” said Alissa Barron-Menza, vice president of Business for a Fair Minimum Wage, a national network of business owners and executives who support the fair minimum wage increase.

High turnover often leads to added costs related to onboarding and training. The amount saved from employee churn could help employers manage some of the increased labor costs.

Increases demand for goods and services

Higher minimum wages would disproportionately affect lower-income households positively, as these households tend to spend a larger percentage of their income. This could lead to an increased demand for goods and services. Therefore, raising the minimum wage may have a stimulative effect on the economy.

“When we raise the minimum wage, we’re putting money in the hands of people who most need to spend it,” said Barron-Menza. “[T]hey turn right back around, and they’re able to replace tires and buy shoes and school supplies for their children, and take family members out for a meal at a restaurant.”

Boosts employee performance

When employers invest in their employees by paying them adequate wages, employees generally respond with improved efficiency. Raising pay could lead to better performance, higher customer satisfaction, increased morale and lower error and accident rates.

“[Employees] who can afford to stick around long enough to know the business very well help the business stay in touch with what customers want,” Barron-Menza said. “And, really, employees make the difference between a repeat customer and a lost customer.”

Cons of raising the minimum wage

Many employers are concerned about how increasing the minimum wage could have harmful effects on their businesses.

Increases labor costs

If the Raise the Wage Act of 2021 is enacted, employers will be responsible for raising wages beyond just those making $7.25 — every employee making between $7.25 and $15 will experience raises until their wages meet the new federal minimum. Employers may also feel pressure to give raises to employees already making above minimum wage, adding additional labor costs.

Certain industries may have a more difficult time accommodating the federal minimum wage increase. Restaurants, for example, typically operate at an average profit margin of 3% to 6%, leaving little room to pay higher wages.

“In Pennsylvania, over half of minimum wage earners work in the restaurant industry. You’re talking about a substantial portion that falls in that category,” said Alex Halper, director of government affairs at the Pennsylvania Chamber of Business and Industry. “[E]specially now, I think many [restaurants] are simply unable to absorb those costs.”

Reduces employment

Increased labor costs and slim profit margins may force business owners to cut their staff. A Congressional Budget Office (CBO) nonpartisan analysis projected that raising the minimum wage may reduce employment by increasing amounts from 2021 to 2025. If the federal minimum wage increases to $15, an additional 1.4 million workers may be unemployed by 2025.

Small business loans may offer temporary financial relief to employers struggling to meet payroll obligations. But in the worst case, businesses that are unable to accommodate rising labor costs may need to shut down.

“Ultimately, those labor costs have to be accommodated somewhere and in many cases, it’s not really feasible,” said Halper. “So I think you’ll see a combination of responses … people are going to lose their jobs and businesses will have to close up shop.”

Reduces the value of lower-skill or inexperienced workers

Increasing the minimum wage could diminish the value of hiring an inexperienced entrant worker, as business owners may find it more cost-effective to hire a higher-paid experienced worker or invest in machines and technology. Among those who would be unemployed as a result of the minimum wage increase, teenagers, less-educated and lower-skill workers would be disproportionately represented.

Starter jobs equip younger workers with experience and fundamental skills, such as teamwork and punctuality, that help advance their careers. Giving younger Americans fewer opportunities for working a part-time or summer job could lead to serious workforce challenges in the future, according to Halper.

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The purpose of the minimum wage

The first minimum wage was established at $0.25 per hour under the Fair Labor Standards Act (FLSA) of 1938. The FLSA created a series of government regulations designed to eliminate conditions “detrimental to the maintenance of the minimum standard of living necessary for health, efficiency and general well-being of workers.” In addition to establishing a wage floor, the FLSA also banned oppressive child labor, created a 40-hour workweek and mandated overtime compensation.

Since 1938, the minimum wage has increased 22 separate times — the most recent wage increase was to $7.25 in 2009. The Raise the Wage Act of 2021 is attempting to increase the minimum to $15 by 2025 in phased stages.

Living wage vs. starting wage

There is a heated debate over the purpose of the minimum wage — specifically, whether the minimum wage should be a living wage or a starting wage.

Advocates for the minimum wage increase believe it should keep pace with inflation so that people can afford to provide for themselves. Anyone working full time should be able to afford the basics, according to Barron-Menza.

Many who explain why the minimum wage should not be raised believe it is not a living wage, but a starting wage — an opportunity for younger adults to gain experience and skills that help propel them into higher-paying positions.

How to handle the effects of raising the minimum wage

If the minimum wage increases, many business owners will have to adapt to absorbing the increased labor costs.

“If the past year has shown anything, it’s the resiliency and the creativity of employers to sustain their operations even under very difficult circumstances,” said Halper.

The following tips can help businesses accommodate navigate these additional expenses:

Adjust your business model to bring in more customers and revenue.

Find innovative ways to pack on more value to help you secure repeat businesses. Service-based businesses can incentivize repeat business with a loyalty program — a hair salon can offer a free haircut after ten visits, for instance. If you sell a product, consider offering a free extended warranty.

If you raise prices but fear losing customers, offering a lower-tier option may help you retain some customers. For example, if you operate a cake boutique that offers only custom-made cake designs, you can sell generic cakes that customers can purchase off the shelf at a lower price.

Automate some positions to reduce your employee count.

Technology and software make it possible to automate certain business operations, reducing the need for human labor. Inventory management software, for example, allows employers to manage inventory while minimizing expenses caused by human error.

The cost of some software may be an affordable alternative to hiring a full-time employee making $15 per hour. This allows business owners to reduce personnel and labor costs without sacrificing productivity. Automating can also be useful for lowering startup costs if you’re starting a new enterprise.

Reduce employee hours or cut costs elsewhere in the business.

Depending on your business, a full-time employee may not be necessary. By cutting hours and automating certain tasks, it’s possible to reduce labor costs while maintaining productivity output.

Exploring other cost-saving opportunities can also increase profit margins. Reducing employee benefits — while not popular among employees — can help a struggling business stay afloat.

Work with independent contractors.

There are some instances where working with an independent contractor can be more cost-effective than hiring a full-time employee. Working with a graphic or web designer on an as-needed basis, for example, may be less costly than paying a salaried employee plus benefits.

Moreover, business owners can save on costs typically tied to hiring a traditional employee. Business owners won’t have to pay benefits or bonuses, while independent contractors are responsible for handling their own taxes.

Increase prices.

Business owners can pass on increased labor costs to the consumer by raising prices. Be careful, though — raise prices too high and too quickly, and you risk turning away customers. If this happens, increased labor costs plus lost customers can further strain a business’s bottom line.

It may be helpful to observe your competitors — if prices are increasing across the board within your industry, customers may be more open to higher prices. Service-based businesses may consider giving notice to clients that you’re increasing your prices: For example, a digital marketing agency can email clients that prices are increasing 10% in three months.

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