Why the Minimum Wage is Bad News for Small Business

Why the Minimum Wage is Bad News for Small Business

Why the Minimum Wage is Bad News for Small Business

payday

Why that’s bad for everyone else, and how raising costs can have disastrous economic consequences.

In a prior blog, I explained how empirical research supports the side of the debate asserting negative consequences due to minimum wage laws. Now we’ll look under the hood to understand more why this might be the case.

After the stock market crash of 1929—yes, I’m taking you back that far—President Herbert Hoover rolled into action to get the U.S. economy out of the recession that would become the Great Depression. Among his activities were efforts to boost prices and wages, including White House conferences to cajole business leaders to maintain wage rates. 

His successor, Franklin D. Roosevelt, went further to promote higher prices and wages, especially with the Wagner Act intended to strengthen labor unions and the National Industrial Recovery Act (NIRA) that established a system of industry cartels that regulated, among other things, wages and prices. 

In 1935, the U.S. Supreme Court struck down the NIRA. In response, the minimum wage became a platform issue for his 1936 reelection campaign, and FDR succeeded in getting a federal minimum wage of 25¢ per hour in 1938.

Economists seemingly agree on little, but one thing they do agree on is that the policies of Hoover and Roosevelt did nothing to get the U.S. out of the Great Depression. Keep this history in mind when you hear advocates who want to raise the minimum wage. 

Importance of small business

Small businesses are at the heart of the American economy. They are a major engine of prosperity and job growth, enriching society and helping to spread wealth at a time when economic disparities are receiving more attention. 

Examples of small businesses are too many to list but include your local restaurant, hair salon, construction firm, dentist, bakery, and small-town law firm. It also includes many franchisees who may own your local McDonald’s, Subway, UPS store, hardware store, senior home care service, or handyman service. 

 

worker and coin stacks

According to the U.S. Small Business Administration

  • There were 31.7 million small businesses in the U.S. in 2017.
  • They employed 60.6 million people, or 47.1 percent of the private workforce in 2018. 
  • That number included 4.2 million self-employed persons of color.

Small businesses created 1.6 million net jobs in 2019.

Not all about profits

Also according to the Small Business Administration, there were 249,000 business start-ups creating 863,000 new jobs in 2018. However, those gains were partially offset by 222,000 businesses shutting down, taking 762,000 jobs with them. 

This comparison is a good way of exposing a common myth about economics: It is not all about profits. It is also about losses. 

If you took an economics course in college or high school, you probably found yourself spending time looking at the impact of losses and how much a business can lose before it must shut down.

What it takes to run a small business 

Running a small business is hard. It requires dedication, resources, and daily decisions to keep operations viable without the benefit of an array of professional managers and departments that large businesses typically have. When a small business owner makes a mistake, he takes a direct hit. If the mistake is large enough, it could threaten his or her livelihood.

Politicians, on the other hand, can make a policy mistake impacting business, but they do not take a direct hit. Because every business is different, it is impossible for politicians to know what it takes for every type of business to stay viable and make a profit. Yet changes in government regulations, taxes, and wage laws can have devastating impacts on businesses.

The ability of businesses to withstand changes in minimum wage laws depends on the circumstances of the business and their profitability. It is naive to assume that every business relying on low-cost labor would be able to pay its employees more just because the government mandates them to do so. 

Many businesses operate on thin profit margins. If their costs go up, they may substitute technology for labor, if they can, which naturally and unfortunately results in workers losing their jobs. 

Worse, the business may have to shut down. It makes no sense to expect businesses to continue operating if they are losing money. Many small business owners who shut down may need to find a job themselves or risk landing in poverty. This helps no one, least of all the laid-off employees.

Final warnings

Beware of large corporations like Amazon or Walmart who might support minimum wage laws. It could be because they see it as a way to drive out competition from small mom and pop businesses.

Forcing small businesses to raise wages, especially after they sustained a financial hit from a pandemic, only promises to weaken an all-important job growth engine for the U.S. economy at a time when we need to bolster the small business sector and get the economy rolling again. This strategy of mandating wage increases certainly did not work out well during the Great Depression. There is no good reason to think it will work now.

So, what do our state and national legislators need to be doing? They need to concentrate on getting the economic job engine revving up again, and this is done by finding ways to reduce costs for businesses (not raising them), making it easier for entrepreneurs to start their own businesses (not making it harder), and making sure the financial markets are working properly so small businesses can access much-needed funds.

Where does all this leave the worker stuck in a low-wage job? Stay tuned. I’ll answer that question in my next blog. 

 

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

 

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | HENRY HERALD

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | HENRY HERALD

The federal Centers for Medicare & Medicaid Services (CMS) could decide in a matter of weeks whether it will remove the work or activity requirement in Georgia’s partial Medicaid expansion plan.

The CMS said the plan, which was approved by former President Donald Trump’s administration in October, does not “promote the objectives of the Medicaid program” and would be impossible to accomplish because of the COVID-19 pandemic…

In a statement released Friday, the nonprofit Georgia Center for Opportunity (GCO) said CMS’ decision could lead to court battles, leaving the thousands of Georgians who stand to get coverage under the program in a lurch.

“Instead of using our resources and time to bicker before the courts, we should apply them to seek out the best ways to improve people’s lives,” said Erik Randolph, GCO’s director of research. “[Georgia Pathways] is based on the idea of helping adults escape poverty, plain and simple. It will propel them into situations where they have better opportunities and more resources for health coverage, such as through affordable individual markets or employed-based coverage.”

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | CENTER SQUARE

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | CENTER SQUARE

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | CENTER SQUARE

The federal Centers for Medicare & Medicaid Services (CMS) could decide in a matter of weeks whether it will remove the work or activity requirement in Georgia’s partial Medicaid expansion plan.

The CMS said the plan, which was approved by former President Donald Trump’s administration in October, does not “promote the objectives of the Medicaid program” and would be impossible to accomplish because of the COVID-19 pandemic…

In a statement released Friday, the nonprofit Georgia Center for Opportunity (GCO) said CMS’ decision could lead to court battles, leaving the thousands of Georgians who stand to get coverage under the program in a lurch.

“Instead of using our resources and time to bicker before the courts, we should apply them to seek out the best ways to improve people’s lives,” said Erik Randolph, GCO’s director of research. “[Georgia Pathways] is based on the idea of helping adults escape poverty, plain and simple. It will propel them into situations where they have better opportunities and more resources for health coverage, such as through affordable individual markets or employed-based coverage.”

Let’s Take Politics Out of Healthcare

Let’s Take Politics Out of Healthcare

Let’s Take Politics Out of Healthcare

healthcare politics

The federal government’s surprise move against Georgia

In a raw political move, the Centers for Medicaid & Medicare Services (CMS) removed the approval of Georgia’s Pathways to Coverage, labeling the program as “pending.” 

Despite the fact that the COVID-19 vaccine rollout is consuming the resources and attention of the Governor’s office and the Department of Community Health, CMS gave Georgia only 30 days to respond before the federal government might eviscerate the program. In its February 12 letter, CMS targeted the program’s work or other community engagement components and also threatened “review” of other provisions of the program. 

This move by the new administration in Washington, D.C., appears to be unprecedented. Finally secured last fall, the approval was part of an administrative process, which included time for public comments, that took years to develop. 

Pathways to Coverage serves non-disabled adults below the poverty line. It is a critical component of Georgia’s plan to reduce the number of uninsured and make healthcare coverage more affordable, without sacrificing quality of care or causing other serious drawbacks associated with a traditional Medicaid expansion. It is based on the idea of not keeping these adults below the poverty line but moving them above it. 

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Let’s focus on helping people instead

Pathways to Coverage is really about helping people. Readers might want to check out my prior blog on this program as well as some of our published research on fixing the healthcare system.

The so-called Affordable Care Act (ACA) has caused havoc for Georgians when it comes to healthcare coverage and costs. The rate of healthcare price increases did not abate but accelerated. As we reported before, our own data analysis confirmed other research by showing that for individual markets, “Georgians suffered average price increases of 70.7% for Bronze plans, 77.3% for Silver plans, and 70.4% for Gold plans” over five years.

We also found that prior to the ACA, the median cost for a health insurance plan on the individual market for a family of four was $5,386 per year. But within six years, the cost varied from $17,550 to $26,081, depending on the level of the plan. 

The bulk of Georgia’s uninsured problem lies not below the poverty line, but above it. Therefore, Pathways to Coverage necessarily links to Georgia’s Reinsurance Program designed to drive down costs in the individual markets. The test of the demonstration project will be to see how well Georgia can move people out of poverty into situations where they have better opportunities and more resources for health coverage, such as coverage through affordable individual markets or, better yet, employer-based coverage. 

America has one of the world’s best and most innovative healthcare systems, if you have insurance to afford it. By far, employer-based and private insurance provides the best coverage. Medicaid has among the worst healthcare outcomes, can trap families in poverty (as we and others have demonstrated), and can be an obstacle in moving to the much-better private coverage. Incentivizing people to improve their circumstances is an important strategy that this demonstration project hopes to prove. 

The Spirit of the Law

The new administration in Washington might feel like they are doing the right thing by attempting to strongarm states like Georgia into Medicaid expansion. However, this action raises concerns. 

First, the question of whether the federal government can mandate states to expand Medicaid was already settled in the negative by a seven-to-two U.S. Supreme Court ruling. Second, removing a critical component of this demonstration project will not likely accomplish expansion but, if followed through, will compromise the effectiveness of the project. Third, it goes against the whole purpose of demonstration projects. 

Pathways to Coverage is an approved—and hopefully remains so—Section 1115 waiver to Medicaid rules, which is found in the Social Security Act. In enacting this section of the law, Congress acknowledged that a one-size-fits-all approach dictated by the federal government is not always the best way to solve our public policy challenges. 

Congress acknowledged this principle again when it enacted Section 1332 of the Affordable Care Act that allows states to come up with alternative plans in coordination with Section 1115 waivers. Georgia took advantage of both these provisions of law in developing its healthcare strategy. 

Finally, demonstration projects allow states to experiment with what works best. Without experimentation, we hinder our ability to discover better ways to run public programs for the benefit of people. 

What’s next

The best overall resolution would be for CMS to reinstate the approval and allow the demonstration to move forward. CMS will monitor the project, of course, but it must let it play out to see if the project will demonstrate a better way. Georgia has a vested interest in making it work. If not, Georgia could choose to modify or abandon the project. Besides, the federal government will have the opportunity to review the results when the waiver comes up for renewal.

Failure to reinstate the approval will likely result in a legal struggle before the courts. Who knows how long such a legal process will take? Instead of using our resources and time to bicker before the courts, we should apply them to seek out the best ways to improve people’s lives. 

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | CENTER SQUARE

City Of Lawrenceville, Gwinnett County And Impact46 Partner To Fund Lawrenceville Response Center | PATCH LAWRENCEVILLE

City Of Lawrenceville, Gwinnett County And Impact46 Partner To Fund Lawrenceville Response Center | PATCH LAWRENCEVILLE

The City of Lawrenceville and Gwinnett County partner with Impact46 to provide $525,000 in funding for the Lawrenceville Response Center (LRC). The Lawrenceville City Council unanimously finalized support at a special called meeting on Wednesday, February 10. Gwinnett County will secure their support for the project through the C.A.R.E.S. Act…

Clock ticks as feds threaten to remove work requirement from Georgia’s partial Medicaid expansion | CENTER SQUARE

Lawrenceville organization gets money for coronavirus help | AJC

Lawrenceville organization gets money for coronavirus help | AJC

A Gwinnett County resource to help residents struggling through the coronavirus pandemic just got a boost in funding.

The Lawrenceville Response Center, which opened last April, this month received more than half a million dollars in additional funding, including money from the city and the county…