Small businesses are hurt by minimum wage hikes. This hypothetical situation describes how the minimum wage kills jobs. Consider a small community clothing store with 50 customers a day for 360 days at $20 spent per customer. Total revenue per year for the business is $360,000. This seems like a lot of money. How could a small hike in minimum wage hurt when the company makes this much money? Well we still need to deduct the costs of doing business. This clothing store has 10 employees all earning minimum wage (for this example is $8 per hour) working 2000 hours a year. This makes labor costs for this small business $160,000. Other expenses incurred by the business are: cost of goods that are sold, licenses, rent / mortgage, utilities, equipment, depreciation, insurance, and miscellaneous supplies come to $150,000 per year, leaving a profit of $50,000 for the owner and his or her family. An increase to the minimum wage of only $1 would raise labor costs by $20,000 (paying more for the same amount of labor) and reduce profit to $30,000. The owner must either reduce his personal expendable income, or raise prices, which in turn reduces the demand for the product, resulting in the loss of a worker or two due to the lower demand. Money for the increase of the minimum wage cost must come from somewhere, either out of the pockets of customers or the owner’s family, and the people who lose their job.
Minimum wage is not the answer to solving poverty. Redistribution of wealth by the federal government can be more effective and less destructive to businesses and low wage employees across this great nation, with the earned income tax credit. The earned income tax credit is a tax credit, direct payment, given to low income workers. This money is a direct injection of extra cash flow to the bottom line of low income households who need it most. The data shows that when the minimum wage is raised the scenario above plays out in small business all over America. In my paper I will attempt to show that redistribution of wealth in the form of minimum wage manipulation does not work in the free market. If society sees a need to make a price floor, the earned income tax credit is much more effective than the minimum wage.
A case study was conducted on the adverse consequences of the minimum wage in the article "NJ And PA Once Again: What Happened To Employment When The PA–NJ Minimum Wage Differential Disappeared?" written by, Saul D. Hoffman and Diane M. Trace. In this article the researchers studied the change of employment numbers of New Jersey and Pennsylvania when the federal government raised the minimum wage in 1996. New Jersey had a higher minimum wage prior to the federal mandated raise and the researchers had the following as a thesis: “We find consistent evidence that employment of “at-risk” groups was negatively affected in PA relative to other groups in PA and to comparable groups in NJ” (115).
In his paper: ...