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A money bag, stacks of cash, and stack of coin represent minimum wage hikes, including small business minimum wage hikes.
Running a business

How to navigate small business minimum wage hikes in 2023

Keeping up with economic changes that affect your small business can be difficult, especially when it directly impacts your operating costs. But with ongoing talks of raising the minimum wage, which is the minimum amount employers have to pay employees in the United States per hour, you might wonder how it'll affect your business. 


As a small business owner, you likely want to maximize your profits while keeping your employees happy and productive with a competitive salary. But with inflation and minimum wage increases, you might not know how to benefit both sides. 


In this article, we'll go over the impact of small business minimum wage hikes, including expert guidance on paying your employees a livable wage while keeping your business profits in check. 


Why there’s a push for higher minimum wage: 6 economic impacts


When inflation rises, it often leads to a push for a higher minimum wage so workers can afford housing and basic needs. But even with the cost of living going up, the federal minimum wage has been $7.25 per hour since 2009, according to the US Department of Labor, which has led many workers and labor activists to fight for a $15 minimum wage. 


To gradually increase the minimum wage to $15 an hour in every state by 2025, in 2021, the government reintroduced the Raise the Wage Act—which was first introduced in 2017 and not passed. Some states have started to adopt a $15 minimum wage, including California and Massachusetts. However, with inflation hitting a record high of 9.1% in 2022, states including New York, California, and Massachusetts are now pushing for a $20 minimum wage, according to AP news


Raising the minimum wage comes with some big economic impacts, including: 


  1. Increase in consumer spending: As workers get paid more, their purchasing power increases, which allows consumers to spend more money, helping to boost the economy. 
  2. Increase in demand for goods and services: With the increase in consumer spending, a higher demand for goods and services boosts the economy. 
  3. Potential impact on employment rates: With higher wages, jobs become more attractive and can boost employment rates for workers looking for a better salary. However, some businesses might hire fewer people due to increased operating expenses. 
  4. Lower poverty rates: Workers can afford basic needs, and families can have a higher income, leading to a stronger economy and lower poverty rates. 
  5. Increase in labor market competition: Overqualified workers might also go after minimum wage positions when the wage is higher, leading to more competition and less experienced workers not having job opportunities. 
  6. Potential lower taxes: With a better standard of living, workers can rely less on government programs, leading to lower long-term taxes. 


Nevertheless, according to the Congressional Budget Office, the impacts of a higher minimum wage are uncertain, as it will depend on how fast the government implements changes and how receptive and capable businesses are to paying a higher wage.


Expert advice

Businesses can prepare for minimum wage hikes by making sure that their policies are in compliance with the applicable laws and regulations.

This includes conducting due diligence to understand local, state, or federal minimum wage rates, assessing payroll and employee information to guarantee accuracy, and developing detailed compensation models that include potential scenarios for increases in wages.

— David Reischer, Employment Attorney and CEO of LegalAdvice.com


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How does raising the minimum wage affect small businesses

How will the push for a higher minimum wage potentially impact your small business? Raising the minimum wage brings advantages and disadvantages to your business, both financially and operationally.

Coin stacks and money stacks sit above a chart listing out how small business minimum wage hikes can positively and negatively impact businesses.

Pros of a higher minimum wage for business

When you think of a higher minimum wage, you might worry about affording higher wages and the overall health of your business. However, raising the minimum wage can have surprisingly good benefits. 


The positive effects raising the minimum wage might have on small businesses include: 


  • Increase in productivity: With higher wages, workers can feel more valued and have less financial stress, leading to an increase in employee productivity and job satisfaction. 
  • Decrease in employee turnover: With increased job satisfaction and higher wages, workers may be less inclined to leave, decreasing employee turnover.  
  • Boost in qualified workers: Higher wages are more attractive to workers with better qualifications, leading to an opportunity to hire more qualified workers. 
  • Higher demands: When people can afford basic needs, they can increase their spending budget, leading to a higher demand for your goods and services. 
  • Less absent workers: Increased work engagement also leads to workers missing work less (aside from illness), leading to higher productivity.

Expert advice

Minimum wage increases can lead to enhanced employee morale and productivity, as well as a reduced turnover rate.

To capitalize on these benefits, businesses should communicate the changes transparently, emphasizing the company's commitment to fair compensation and its investment in the workforce.

— Quinn Johnson, Tax Associate at CMP


Potential cons of a higher minimum wage for business

Although a higher small business minimum wage can bring certain benefits, there are some ways it can impact your business negatively. 


The negative effects raising the minimum wage could have on small businesses include: 


  • Higher labor costs: When you have to pay employees higher wages, your labor costs will also increase. You might also have to adjust pay for higher-level workers to account for the increase. 
  • Increase in prices: To afford higher wages, your business might have to increase prices for goods and services, which can lead to customers not being able to afford what you sell. 
  • Decrease in employment: An increase in labor costs can lead to fewer job opportunities if your business can't afford to pay for more workers. 
  • Bigger competition: An increase in prices of goods and services could also lead to more competition, as other businesses might be able to afford higher wages without increasing prices. 
  • Reduced profits: Increasing your labor costs can also decrease your gross profits, as your costs may be higher than your revenue.

Expert advice

Businesses tend to have an issue balancing their finances after huge changes to governmental laws. This is why preparation is important. Make sure you have money allocated for all areas of change and adjust accordingly. It is imperative to keep up with laws related to the state you work in and always keep up with the requirements of the federal government.

— Francois M. Haasch, founding attorney at Fran Haasch Law Group


How small businesses can prepare for minimum wage hikes

Whether the minimum wage will stay the same for the next couple of years or it'll increase in your state, it's a good idea to stay prepared. By getting your business ready for a potential minimum-wage increase, you and your employees can take advantage of what it brings and minimize the negative effects.

Five icons represent ways to be prepared for small business minimum wage hikes, including increasing wages regularly, cutting down on wasteful spending, and gradually increasing prices.

Here's how you can prepare before minimum wage increases: 


  • Regularly increase wages: Consider voluntarily raising your wages every year or every couple of months to reduce the impact of a minimum-wage increase and reduce turnover. 
  • Decrease in expenses: Absorb the impact of increased labor costs by cutting down on wasteful spending. Consider cheaper ways to run your business, such as decreasing energy consumption. 
  • Increase your prices: Consider increasing the prices of your goods and services in a way that's justifiable so your customers can still afford them. 
  • Reduce operating hours: Depending on your business, you might be able to reduce the working hours to reduce operating costs by considering what time of the day you make the most revenue. 
  • Make changes gradually: Find ways to absorb a higher minimum wage in small increments to reduce the impact on your business and prepare you for the future. 


Preparing for a small business minimum wage hike is also about corporate social responsibility. Make sure your employees are getting paid what they deserve so you can have happier and more productive employees.


Expert advice

Businesses should explore opportunities for support from government or community organizations when there is a minimum wage increase.

This may include seeking out tax incentives or grants, applying for favorable loan terms and conditions, or partnering with other businesses to share costs and resources related to a wage increase.

— Marcus Fernandez, attorney and co-owner at KFB Law


Minimum wages in all 50 states in 2023

As you may know, minimum wage laws vary by state. Even though there's a push for an even higher minimum wage, only three states have a minimum wage of $15 and above. Additionally, almost half the 50 states still have the federal minimum wage of $7.25 as their state's minimum wage.


Here are the minimum wages in each US state in 2023, according to the US Department of Labor (as of article publish date):

Run your business with confidence

Striking a balance between paying your employees a higher livable wage and reducing your labor costs can be a difficult task. But staying prepared for small business minimum wage hikes can offset these costs ahead of time, so a minimum wage increase won't affect your business negatively. 


Investing in payroll software allows you to automate your payroll, offer competitive employee benefits, and give you insights on wages to prepare you for future minimum wage increases.


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