April 21, 2004

Highlights: State Minimum Wages and Employment in Small Businesses

For a copy of the full report click here.

For additional information contact James Parrott at parrott@fiscalpolicy.org or at 212-414-9001 x221.

This report examines the effects of minimum wages on employment and payrolls in small businesses. The analysis makes several comparisons between states with a higher minimum wage than the federal $5.15 minimum and all other states (i.e., those states where the $5.15 federal minimum prevails). Particular attention is paid in this report to the retail sector since that is the industry employing the most workers at low wages.

The last time the federal minimum wage was increased was in September of 1997. Since then, a growing number of states have raised their own minimum wage levels above the federal $5.15 level. There are currently 12 states, plus the District of Columbia, that have a higher minimum wage. These 12 higher minimum wage states comprise a diverse set of states and include five northeastern states (Connecticut, Massachusetts, Maine, Vermont, and Rhode Island), the five West Coast states (California, Oregon, Washington, Alaska, and Hawaii), and Delaware and Illinois.

To provide a thorough empirical basis for assessing the effects of minimum wages on employment, particularly for small business, this report makes comparisons between these two groups of states (higher minimum wage states and all other states) for the period since 1997, in terms of:

• total nonfarm employment,
• total retail employment,
• employment and average payroll per worker for all small businesses (defined as those employing less than 50 workers), and
• employment and average payroll per worker for small retail businesses.

The overall conclusion of this analysis is that since 1997, employment growth (all nonfarm employment and retail employment) in states with a higher minimum wage than the federal minimum has performed at least as favorably as in states where the $5.15 federal minimum prevails. That is, state minimum wages higher than the federal minimum wages have not adversely affect employment growth over the past few years. This conclusion holds for both the expansion phase of the economy – the years 1998 through 2000 – as well as the years of recession and extraordinarily slow growth since then (2001 through 2003).

In fact, when considered in the aggregate, taking all states together in two groups, employment outcomes have generally been more favorable in the higher minimum wage states than in all other states. Consider these examples:

• Total employment in the higher minimum wage states increased by 6.2 percent from January 1998 to January 2004, 50 percent greater than the combined job growth of 4.1 percent for the other states where the federal minimum wage prevailed; and
• Retail employment grew by 6.1 percent in the minimum wage states versus 1.9 percent in the other states.

And in looking at the growth in establishments, employment and payrolls for small employers with fewer than 50 employees, a similar picture emerges: small employers in this diverse set of higher minimum wage states generally fared better than small employers in other states between 1998 and 2001 (1998 and 2001 are the years for which the government's County Business Patterns data make a comparison possible). (Small employers with less than 50 employees accounted for 95 percent of all establishments and 41 percent of total employment.)

The results for small employers included:

• In the under 50 employee size range across all industries, the number of establishments increased by 3.1 percent for the higher minimum wage states compared to a 1.6 percent increase for the balance of the states; and
• Within the retail industry, the number of establishments increased by 0.6 percent for the higher minimum wage states (compared to 0.3 percent for all other states), the number of employees increased by 3.7 percent (versus 2.4 percent), total annual payroll increased by 17.9 percent in the higher minimum wage states and average payroll per worker increased by 13.7 percent (versus, 14.7 percent and 12.0 percent, respectively, for the other states.

We do not know enough from this analysis to conclude that increasing the minimum wage will boost employment growth over what it otherwise would have been. What does seem to be clear, however, is that it is hard to sustain the argument made by some observers that an increase in the minimum wage will result in adverse aggregate employment outcomes.

The analysis of employment and payroll data in this report -- across all states since the last increase in the federal minimum wage -- suggests that it is hard to argue that, in the aggregate, all businesses, or all small businesses, will be adversely affected by higher minimum wages.