The term minimum wage refers to the lowest legally accepted remuneration for employees. It is the lowest the price floor beyond which the laborers can supply their labor despite the existing demand. Even though the minimum wage is set by the government, there is a section of the labor market that entirely depends on demand and supply to set the equilibrium price. For example, the highly skilled workers who are in short supply will set their wages based on prevailing market forces. Currently, the U.S. has minimum rates of 7.25 dollars per hour which translates to 15080 dollars annually (Statista, 2019). The rates vary from one country to another and depend on various factors including the country’s economy. For instance, nations with developed economies have a higher minimum wage compared to the developing nations. Nonetheless, most employers use the minimum wage to set the rationale of rewarding their employees.
Small businesses have a strong relationship with the lowest labor rates set by the government. The primary customers for small business are laborers on the lower end of the salary hence the strong the relationship. As a result, the performance of these businesses depends on the available disposable income among their main customers. In the U.S., small business is organizations that less than five hundred employees. Other jurisdictions have a varying definition of what constitute small businesses. For example, the European Union defines them as an organization with fifty or fewer employees whereas Australia limits the number to fifteen. Besides the labor force, other measures like assets, sales, and annual revenues are also occasionally used in the classification. Based on the definitions, small businesses constitute the highest number of retailers of various items. The accessibility of these businesses to the majority of the populations makes them favorite destinations for shoppers. As a result, they are directly impacted by the minimum wage.
Firstly, the minimum wage determines the amount of disposable income an individual or household has. A disposable income is an available amount to spend after the deduction of taxes and social security. It is that amount that one takes home from his or her gross salary after all the statutory deductions. An increase in minimum wage means that people have more money in their pockets thus improved purchasing power (Bea, Collado, & Mechelen, 2015). Consequently, they can afford to buy more items for their consumption at the prevailing market prices leading to the increase in demand for these good. The business thus increases its supply to sustain the demand growth occasioned by improved buying ability. On the other hand, lowering the minimum wage adversely impact the demands for goods and services due to the reduced disposable personal income. The small business thus has to reduce the supply to match the prevailing demand.
However, some of the small businesses are likely to experience negative impact despite the increase in the minimum wage. A rise in available spendable income creates a desire to meet higher needs in the hierarchy as described by Maslow. In the needs pyramid, the physiological needs are the base followed by safety needs, love and belonging needs, esteem needs, and self-actualization respectively (Rodwan, Mohammed, & Syed, 2018). A low wage means the employee seeks to meet her or his physiological needs like clothing, food, and shelter without considering the place of purchase. However, a sudden increase in salary activates the desire to shop in a given outlet thus negatively small businesses like estate groceries. Shopping in established outlets creates a mental satisfaction by feeling associated with particular social-class.
The increase in the minimum wage also impacts the cost of production. Most small businesses do not have the financial muscle to pay employees a huge salary. As a result, they rely on the lowest cost of labor as a benchmark for rewarding their employees, especially unskilled workers. A move by the government to raise the lowest salary means these small organizations have to incur additional costs in salary payments. The overall impact of the move is that it pushes the marginal cost upward which leads to a price increase of the final product (Frischmann & Hogendorn, 2015). An escalation of labor costs puts the companies in a tight position to either reduce the number of employees or increase the prices of their commodities. Unlike the large corporations, small business does not enjoy the economy of scale hence any disturbance in the costs of production creates an enormous challenge. Reducing the number of employees means the organization maintains the same expenditure on labor despite the rising marginal cost thus retaining the prices of the product (Pollin & Wicks-Lim., 2016). Conversely, the company is likely to experience declined productivity to exhaustion occasioned by understaffing. On the other hand, increasing the prices of the commodity is likely to make them uncompetitive in the market due to cheaper good from large corporations that easily absorb the slight increases.
In conclusion, the minimum wage directly impacts the small businesses either internally or externally. Internally, it results in the increase of marginal cost which forces the organization to either raise the price of the final product or reduce the size of the labor force. As an external factor, minimum wage determines the available disposable income among employees thus directly impacting the market demands.
Bea, C., Collado, D., & Mechelen, N. V. (2015). The end of decent social protection for the poor? The dynamics of low wages, minimum income packages, and median household incomes.
Frischmann, B., & Hogendorn, C. (2015). Retrospectives: The marginal cost controversy. Journal of Economic Perspectives, 29(1), 193-206.
Pollin, R., & Wicks-Lim., J. (2016). A $15 US minimum wage: How the fast-food industry could adjust without shedding jobs. Journal of Economic Issues, 50(3, 716-744.
Rodwan, F., Mohammed, H., & Syed, J. (2018). A Critical Review of Maslow’s Hierarchy of Needs Employee Motivation in Saudi Arabia. Palgrave Macmillan.
Statista. (2019). State minimum wage rates in the United States as of January 1, 2019, by state ( in U.S. dollars). Retrieved from Staista: https://www.statista.com/statistics/238997/minimum-wage-by-us-state/