Swaroop Bhagavatula
Sr. Policy and Data Analyst
NFIB Research Center
The state of California has turned into the regulatory test kitchen for the U.S. economy. And most recently, attention has turned to the minimum wage. In a recent U.S. Senate debate, a candidate proposed a $50 minimum wage in California. On the flip side, the current minimum wage law includes a significant exemption, acknowledging the challenge for some businesses to comply with higher wage requirements. The challenge is especially true for small businesses. In fact, NFIB’s 2020 Small Business Problems and Priorities found that 20 percent of small business owners reported that the state’s minimum wage law is a critical issue in operating their business.1
Representative Barbara Lee recently proposed a $50 minimum wage during a televised debate in a U.S. Senate race in California. Rep. Lee defended her comments citing a United Way study indicating that a family of four needed $127,000 to survive in the San Francisco Bay Area. The debate moderator asked Rep. Lee about the impact on small businesses. She responded that she previously owned a small business, and therefore knows that her minimum wage proposal wouldn’t harm small businesses. However, Rep. Lee started her business in 1987 when California’s minimum wage was $3.35 (or $9.35 in today’s dollars). California’s minimum wage environment in 1987 was very different from today’s.
In contrast, reality revealed the true impact of a higher minimum in the current minimum wage law that requires fast food businesses to pay a minimum of $20/hour starting April 1, 2024. However, the law exempts businesses if they own a bakery. Governor Newsom said its not politically motivated but the evidence points to the fact that Panera bread is a large beneficiary of this exemption and Billionaire Greg Flynn, one of the largest franchise owners of Panera was a major donor to the governor. The motives behind this is highly questionable but it does highlight the fact that this law has a significant carve out due to its negative impact on certain businesses.
The minimum wage negatively impacts certain industry sectors more than others, but also disproportionately impact smaller businesses compared to their larger counterparts. Large corporations are already at an advantage over small businesses in dealing with these cost increases. They tend to have higher margins and are able to absorb higher labor costs. Companies like Amazon that typically pay higher wages have actually advocated for a higher minimum wage in the past knowing the negative impact to their business would be negligible. Rep Lee’s proposal would devastate small businesses that are already struggling under the weight of labor shortages, inflation, and an uncertain economic outlook. According to NFIB’s recent Small Business Economic Trends survey, 40% of small businesses already report that they are planning to raise wages in the near term in response to inflation and labor shortages.2 This is in response to market conditions, not to bureaucratic rules based on regulator preferences.
Rep Lee’s comments that a business with well paid employees is good for productivity misses the fact that the businesses have to be able to stay open. Any business, particularly small businesses, that is hiring minimum wage workers that now has to pay $50/hour would very likely have to go out of business. They not only would have to pay the lowest paid workers $50/hour but they would also have to pay workers with more tenure and experience $50 plus an additional amount, raising costs even further. The impact of this would disproportionately impact restaurant and hospitality firms as they have the highest percentage of minimum wage workers compared to other industries. These industries also tend to be fairly cyclical and need flexibility to account for economic shocks; It is highly unlikely that they have the capacity to increase prices to cover higher payroll costs.
Rep Lee’s proposal is completely out of touch with the struggles many small businesses face in terms of operation cost, competitive pricing of their good/services, and labor pressures. Small businesses are not instruments of social policy. For millions of workers, the opportunity to gain experience and start a career, is through an entry level on-the-job training. A $50 minimum would make these jobs unaffordable for small businesses and end those opportunities for many trying to enter the workforce in their selected industry. San Francisco is a very expensive place to live and not even remotely close to the cost of living in most of the country. Wages should be set by markets, not bureaucrats.
1 https://assets.nfib.com/nfibcom/NFIB-Problems-and-Priorities-2020.pdf
2 https://www.nfib.com/surveys/small-business-economic-trends
