The Pros and Cons of Raising the Minimum Wage

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 — a figure that hasn’t changed since 2009. However, the minimum can vary at the state level; for example, California’s minimum wage is $16 per hour. Maryland and Massachusetts have enacted legislation to increase the minimum wage to $15.

Most recently introduced in July 2023, the Raise the Wage Act of 2023 aims to increase the federal minimum wage to $17 per hour by 2029. If enacted, the pros and cons of raising the minimum wage may necessitate changes in how employers conduct business.

Pros of raising the minimum wage

Looking beyond the rising labor costs that a higher minimum wage causes, you could find multiple advantages for businesses that explain why lawmakers should raise the minimum wage.

Improves employee performance and 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.

A study by researchers from the Kellogg School of Management at Northwestern University and HEC Montreal found that employees become more engaged, productivity increases, and turnover improves when wages go up.

High turnover often leads to added costs related to onboarding and training, not to mention non-quantifiable costs like lower team morale and damaged customer relationships. 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. These households tend to spend a larger percentage of their income on core needs such as housing, transportation and food. Raising the minimum wage could give these families more money for discretionary spending, increasing demand for goods and services. Therefore, raising the minimum wage may have a stimulative effect on the economy.

Cons of raising the minimum wage

Many employers are concerned about how increasing the minimum wage could harm their businesses.

Increases labor costs

If Congress passes the Raise the Wage Act of 2023, employers will be responsible for raising wages beyond just those employees making $7.25. Every employee making between $7.25 and $17 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 difficulty accommodating the federal minimum wage increase. Consider restaurants, for example, which typically operate at an average profit margin of 3% to 9%.

Currently, federal law allows employers to pay employees who receive at least $30 per month in tips a lower minimum wage of $2.13 per hour, although some states mandate a higher level.

The Raise the Wage Act of 2023 would gradually raise and eventually eliminate the lower tipped minimum wage. With such low profit margins, restaurants have little room to pay higher wages without increasing prices.

Reduces employment

Increased labor costs and slim profit margins may force business owners to cut their staff. A Congressional Budget Office (CBO) nonpartisan analysis of a prior version of the Raise the Wage Act projected that raising the minimum wage might raise the income and earnings of many low-wage workers but could cause other low-wage workers to lose their jobs.

Small business loans may offer temporary financial relief to employers struggling to meet payroll obligations. But in the worst case, businesses that can’t accommodate rising labor costs may need to shut down.

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 automation. 

Teenagers, the less-educated, and lower-skill workers would be disproportionately represented among those who would be unemployed as a result of the minimum wage increase.

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.

The purpose of the minimum wage

Congress established the first minimum wage at $0.25 per hour under the Fair Labor Standards Act (FLSA) of 1938. The FLSA created a series of government regulations 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 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 2023 attempts to increase the minimum to $17 by 2029 in phased stages.

Living wage vs. starting wage

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

Advocates for the minimum wage increase believe it should keep pace with inflation so people can afford to provide for themselves. If the minimum wage kept up with inflation, anyone working full-time should be able to afford the basics.

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.

The following tips can help businesses accommodate and navigate these additional expenses.

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

Find innovative ways to add more value to help you secure repeat business. 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 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 allow certain business operations to be automated, 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 $17 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. Cutting hours and automating certain tasks can 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.

In some instances, working with an independent contractor can be more cost-effective than hiring a full-time employee. For example, working with a graphic or web designer on an as-needed basis 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, and 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 by 10% in three months.