Good for Business

By John Alexander Burton and Amy Hanauer | May 10, 2006

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Small Business growth and state minimum wages

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The minimum wage has worked for all Americans since its introduction 68 years ago, yet the federal government has allowed the minimum wage level to deteriorate in real value to its lowest point in 50 years. In response, 20 states and the District of Columbia have raised their minimum wages above the federal level, up from three in 1996.

A new study by the Center for American Progress and Policy Matters Ohio illustrates that these state initiatives have proven to be good government policy. The study compares the performance of small businesses with under 500 employees in the 39 states that accepted the federal minimum wage before 2003 to the 12 states (including the District of Columbia) that had minimums above the federal level in January 2003. The study found that between 1997 (when more states began having higher minimums) and 2003:

• Employment in small businesses grew more (9.4%) in states with higher minimum wages than federal minimum wage states (6.6%) or Ohio.
• Inflation-adjusted small business payroll growth was stronger in high minimum wage states (19.0%) than in federal minimum wage states (13.6%) or Ohio.

More data became available in 1998, allowing further analysis. Between 1998 and 2003:

• The number of small business establishments grew more in higher minimum wage states (5.5%) than in federal minimum wage states (4.2%) or Ohio.
• Small business retail employment grew more in higher minimum wage states (9.2%) than in low minimum wage states (3.0%) or Ohio.
• Retail payroll grew more in higher minimum wage states (12.3%) than in low minimum wage states (6.4%) or Ohio.
• States with high and low minimum wages had similar growth in number of restaurants, restaurant payrolls, and restaurant employment.

Contrary to the claims of critics, states with higher minimum wages have generally performed as well or better economically than states with lower minimums since 1997. This is in keeping with most recent empirical research on the minimum wage. A higher minimum wage will help 719,000 Ohio workers better support themselves and their families, and is unlikely to lead to aggregate employment loss, payroll loss or establishment closure among small business. A high minimum wage is consistent with a thriving economy that works better for all Ohioans.

Read the full report (PDF)