As more states proceed with minimum wage increases on their own, a new study shows that small businesses grow faster in states with minimum wages above the federal level, which has remained at $5.15 since 1997.
The study, conducted by the Fiscal Policy Institute, a nonpartisan research and education organization based in New York, found that businesses employing fewer than 50 people added more new jobs in states that have raised wages.
With higher base wages, the study contends, retention is improved, and businesses ultimately save money on hiring and training new workers.
"I was surprised at the consistency of the results," said James Parrott, an institute spokesman. "The data was studied in many different ways and no matter where you cut the data the results were the same."
On Thursday, Massachusetts became the latest state to take up the issue, with the state Senate voting to raise the minimum wage from $6.75 an hour to $8.25 by September 2007, which would make it the highest in the nation. Under the proposed bill, future minimum wage increases starting in 2008 will increase automatically with the rise in inflation. House lawmakers still need to negotiate the bill and take a vote for it to pass.
Currently, 18 states and the District of Columbia have set their minimum wages above $5.15. The Fiscal Policy Institute studied state-level small-business growth using government data available between the years of 1998 and 2003. At that time, only 10 states and the District of Columbia had minimum wages above the federal level.
The retail sector is most likely to employ low-wage workers, according to the study, and therefore saw the biggest gains. Between January 1998 and January 2003 retail employment in the 10 states (and District of Columbia) with higher minimum wages grew by 10.2%, nearly tripling the 3.7% retail job growth in the rest of the nation.
Many small-business advocates, however, maintain their opposition to higher minimum wages. "With high health-care costs and rising energy costs, the rise in minimum wage is one more heavy burden on small businesses," said Erin Trabucco, general counsel for the Retailers Association of Massachusetts.
"It's expensive to do business in Massachusetts, and this could force small businesses to lay off employees or keep them from hiring new ones," Trabucco added, noting that raising the minimum wage "affects the least-skilled employees the most."
Bruce Phillips, senior economist for the National Federation of Independent Business, which has long lobbied against minimum wage increases, noted that higher minimum wages inevitably cause higher payroll costs all the way up a company's ladder. "Only 2.8 to 2.9% of workers in the U.S. receive the minimum wage," Phillips said. "Minimum wage by itself isn't the problem."
Three-quarters of the NFIB's some 600,000 members -- most of them employing between four and eight people -- oppose any increase in the federal minimum wage, according to Phillips.
In April, Maine Gov. John Baldacci signed into law an increase to $6.75 an hour by October 2006 and to $7.00 the following year. New Jersey and Michigan will also raise their minimum wages in October.
"Initially [the small businesses] were concerned, but they see the social need for the increase," said Maine Rep. John L. Tuttle Jr. (D-Sanford), who sponsored the bill. "I've gotten mostly positive results from my district. Their money will go right back into the economy and help the mom and pop businesses."
Other states that have passed laws to raise their minimum wage by January 2007 include Hawaii, New York, and Connecticut. Washington state currently has the highest minimum wage at $7.63.