A minimum wage is the lowest wage an employer can legally pay his or her workers. There are two schools of thought on minimum wage. First, the supply-side economists say the wage of a worker should be determined by the level of skills and the market forces. On the other hand, the demand-side economists see the minimum wage as a means of lifting unskilled workers out of poverty. However, multiple studies suggest that, the minimum wage has `no preference’ benefits to small businesses. Let me walk you through some of the reasons why small businesses ultimately suffer the most from minimum wage;
Increase in labor costs
Once the government sets the minimum wage, the small businesses will have to bear the upward pressure of labor costs. However, the wage increase might not be sustainable in the long-run. This extra cost of labor will be passed to consumers. Alternatively, the business might be forced to reduce the number of skilled employees to keep up with the minimum wage. This extra cost can lead to increase in prices of products. When the prices are too high, you will lose your customers to other business selling the same line of products. Customers will always buy reasonably priced products. In case of unprecedented economic move, this is likely to do more harm than good to the business.
Decreased sales, revenues and profits
When employees are overworked, they become less productive. Further, they will offer poor customer service and will be more prone to errors. More work means that employees will be less motivated. This can also lead to absenteeism which affects the general performance of the business. Secondly, during the low season, the business is likely to make less or no profit. In fact, some business might be forced to close down once they are unable to meet the high cost of labor.
The cost of training increases
As the wage rises, it becomes more difficult for small businesses to hire more skilled workers. Business owners will be forced to go for the unskilled labor. To ensure they perform as per the expectation, the unskilled workers must be trained. Sometimes it becomes difficult to estimate the cost of training. The cost can be higher than hiring skilled labor.
Start-up small business may take long to break-even
Every person who starts a business calculates the payback period. If you are new in business and your resources are limited, it will take much longer for the business to break-even. When the minimum wage increases, the business owner will be forced to either get rid of some employees or pump in more cash to meet the extra cost of labor. This means, the business owner will have to be patient to recover his or her initial cash outlay. In some cases, the payback period might not be realistic which can make the business owner do away with the business. When one has no preference to skilled labor, the business might never get started.
Economists believe polices should not be judged by their intentions but rather by their results. After rigorous analysis, it’s clear that the minimum wage increase will always do more harm than good to small business.