Repeat after me: Higher minimum wages are good for business
Increases in minimum wages in a country or different states of the US are sure to make headlines. Inevitably, businesses will complain that this will cost jobs, particularly at smaller, independent businesses that are often less flexible and more cash-strapped. But has anyone ever looked at the empirical evidence to see if this is really true? Yes, of course they have.
The consensus among economists is that higher minimum wages do not necessarily lower employment in the aggregate. However, you wouldn’t know that if you just read the newspapers and watch cable news.
Now, Nirupama Rao and Max Risch have taken a closer look at the supposedly most vulnerable firms: Small independent businesses. They used changes in the minimum wage across different US states as a testing ground to see how these small businesses react to rising minimum wage requirements. Do their profits drop? Do they fire people, or at the very least, hire fewer people?
Let me tell you the main story in three charts. First, here is the change in profits for these small businesses in the years after the minimum wage increased. Turns out, no drop in profits. While costs rise for these small businesses, revenues increase as well and offset these higher costs. Why is that? I have explained here why people who look at changing taxes or wages forget the other side of the story that negates their claims.
Change in small business profits after increases in minimum wage
Source: Rao and Risch (2026)
Second, higher minimum wages do not reduce employment, not even among the lowest-paid workers. There is some evidence that businesses reduce part-time hiring, but the aggregate effect is one where that doesn’t matter and is compensated for by jobs created elsewhere.
Change in low-wage employment after increases in minimum wage
Source: Rao and Risch (2026)
Indeed, higher minimum wages seem to be beneficial for small businesses. The third chart shows changes in employee retention rates after minimum wages increased. On average, existing employees were slightly more likely to stay longer at their employer if they got a higher wage. And that reduces costs for businesses in the medium term because every employee who leaves creates costs for hiring and training a new employee.
Change in employee retention after increases in minimum wage
Source: Rao and Risch (2026)
Thanks. Good post. I suspect this is why the UK has refused to go into recession over the last four years despite constant predictions of the opposite from economists.
The introduction of a minimum wage was a form of political interference in the free market economy. The policy was introduced throughout western economies in the late nineties. It created a wave of social and economic consequences back then. The premise was that it would keep people out of poverty. In my view it made poverty more likely. It was noticeable at the time of introduction, that many redundancies took place in the middle management level of large companies. It was not that the positions were no longer required. They were rebranded through altered job descriptions and re advertised at lower salaries. Why would an encumbant manager on 50k apply for his own job now advertised at 25k? New positions were advertised just above the minimum wage often with the fanfare “we don’t just pay the minimum wage!” At the employee level, wages fell, overall, as a consequence of this policy. At boardroom level remuneration flourished. By the mid to late nineties poverty had been radically reduced in the uk. From the point of the introduction of the policy along with other factors it returned to the agenda.