Equating higher minimum wages to a financial end of times has become a popular thing to do recently. It will crush many businesses that can't afford higher labor costs! There is no reason to pay more for unskilled jobs!

But are these statements really true, or merely claims pumped out by the likes of the Chamber of Commerce, which supports many larger companies whose business models have long depended on keeping wages in many positions depressed?

The Data

David Cay Johnston, a long-time investigative reporter who won the Pulitzer Prize for his coverage of tax policy when he worked for the New York Times, has an interesting take. He looked at Washington State, which has the highest minimum wage in the nation. Washington also led the 20 largest states in small business job creation in a year-over-year comparison, according to an analysis from Paycheck IHS.


Johnston attributes the performance to the increased "aggregate demand--the collective capacity to buy goods and services." Because more people have more money, they can spend more. The spending drives the economy and all businesses need additional help, so they create new jobs.

This isn't a new concept. Affluent people may have more money to spend, but there is a limit to how much they can consume. There just aren't enough of them. To make the economy go, there has to be widespread spending. You get more spending when everyone has more to spend.

Johnston used Washington as a single counter to the drone of "higher minimum wages will destroy us all." It certainly disproves the general statement. But there's another interesting pattern in the data that Johnston didn't investigate. I plotted the minimum wages of each of these states against the amount of annual job growth for small companies. I took out Tennessee, because there was no minimum wage, and ran a statistical correlation function in the spreadsheet.

The result was 0.23. There's some weak positive correlation, which means that if there's any trend, it's that higher minimum wage was accompanied by higher annual small business job growth--the opposite of what so many assume. In other words, if your state raises the minimum wage, you'll be more likely to add jobs, not cut them. And that means you'll likely have a growing business, because how many small business owners add staff for any other reason?

The correlation is far from perfect, so there are clearly other factors involved. Raising the minimum wage won't necessarily, of itself, improve the economy, pushing small businesses to add employees. But it isn't going to hurt it.

The reaction of many reminds me of similar responses to changes in the business climate over the decades. When the Clean Air Act was passed, companies want ballistic. It would absolutely kill the economy and destroy American business. Like Sarbanes-Oxley would cripple companies and shred profits. Except here, and in other examples, nothing of the sort happened.

People react to challenges with innovation. They figure out smarter ways of doing business and often become even more profitable than before. So, the next time you hear about a potential minimum wage hike, instead of spending your time lobbying legislators for action that might actually make things worse, look at how you could overcome the challenge and strengthen your business. It's a smarter way to spend time and money.