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How A Federal Minimum Wage Hike Would Affect Small Businesses

AUDIE CORNISH, HOST:

Fifteen dollars an hour - that would be the federal minimum wage by 2025 if President Biden had his way. It's a proposal Republicans oppose - some moderate Democrats, too - in part because of how it would affect small businesses. But there are a lot of open questions about what those effects might be. Many states have already passed their own minimum wage hikes, so we do have some clues. Take Colorado, home to The Noshery bakery in Denver.

ANDREA KNIGHT: Our hope is you walk in with lots of smiling faces, people recognize you, and we already get your coffee started for you.

CORNISH: In 2016, Colorado raised its minimum wage, and by law, it goes up a little bit more each year. For The Noshery, keeping up has been a constant struggle.

KNIGHT: Every year you kind of have to grapple with, am I going to raise my prices? Do I have to cut in the quality of my goods, or do I take the hit? And I already don't make any money, so (laughter).

CORNISH: Her servers make tips, and the minimum wage in Colorado for tipped workers is just over $9 plus tips. It's a bit higher in Denver. But Biden's proposal would phase out having a different minimum wage for tipped workers.

KNIGHT: It is kind of our biggest unknown for the future in being able to plan for the minimum wage.

CORNISH: All of this, Knight says, is complicated by the pandemic, which, of course, has devastated so many small businesses. Knight has had to make difficult choices amid the pandemic and these minimum wage hikes.

KNIGHT: I have had to really take a look at our staff and go, do we have to bring someone down to part time? And that's heartbreaking. I don't want to do that. It is something where we definitely used to have a much larger team when I first opened in 2014.

CORNISH: So Colorado has been moving toward $15 an hour for a while now. Florida is just getting started. In November, voters approved a new minimum wage. It will increase to $15 an hour by 2026.

ARTURO LOPEZ: We have our own little taqueria. We also have a bakery and a meat department, carniceria.

CORNISH: That's Arturo Lopez (ph). He manages this small chain of markets owned by his dad. They have a handful of locations, and he starts employees at around $9 an hour.

LOPEZ: I believe raising the minimum wage - I don't want to just come out and say it, but I just will. I believe it is a huge mistake considering the more money people make, the more expensive everything is going to get.

CORNISH: Lopez is worried about what might happen.

LOPEZ: Our workers - we treat them like family. So that would completely be our last option, to lay them off. But then, of course, raising prices and everything - customers tend to see that a lot. And of course, they're always going to go to the more cheaper locations.

CORNISH: All right, so two views there on what it could mean to raise the minimum wage to $15 an hour. We're going to zoom out and get the macro-look at what President Biden and the Democrats' plan would mean for the economy and job growth. It's a heated debate among politicians and economists. Here's one report that's often cited. In 2019, the nonpartisan Congressional Budget Office found that 1.3 million jobs could be lost if the minimum wage were raised to $15 an hour.

But many high-profile economists have taken issue with that number, including Arin Dube. He's a professor at the University of Massachusetts Amherst, where he's studied the economic effects of the minimum wage. And he's tried to make sense of all these conflicting studies that try and explain what happens when you raise the minimum wage.

ARIN DUBE: So it's really important to understand that CBO's estimates suggested that while they expected some job loss, the wage gains would be substantially larger. As a result, you would have fewer people in poverty. Now, in my review, I was able to use a similar methodology as they did but a larger set of studies, more up-to-date studies. I found somewhat smaller impact than they did and even more promising impact of the policy in raising wages while having relatively modest possible impact on jobs.

CORNISH: Can you give us an example? Meaning, is there a case study that can help us understand what happens to an economy when the minimum wage goes up to, let's say, this number, $15 an hour?

DUBE: Well, we have a number of states in the country now - California, Massachusetts, where I am - where the minimum wages have risen substantially over the past five years. At the same time, at least prior to the pandemic, we saw employers continuing to hire and continuing to do well and wages continuing to rise, including in low-wage sectors like restaurants. And the reason for that is employers have a number of different ways of adjusting when the minimum wage rises. One of them is passing it on as price increases to consumers. Maybe the burger costs 50 cents more, and middle and higher-income consumers end up helping pay for higher wages at the bottom. Another possible way of responding is that employers see reductions in turnover. And turnover is costly for businesses because you have to retrain and recruit workers. As these jobs become better, you end up seeing workers stick around longer. And that also helps defray some of the costs.

CORNISH: Can I come back to the price increase? Do things get more expensive for consumers in the places where the minimum wage has gone up?

DUBE: Prices definitely rise, but they rise very small amount when it comes to the overall inflation. And the reason for that is because minimum wage workers' earnings are a really small part of the overall economy because they're the lowest paid workers. So you're not going to really notice overall price increases, even when minimum wage rises quite a bit. But it does mean that those small increases nonetheless help absorb the cost increases for low-wage employers.

CORNISH: You mentioned California and Massachusetts, and that leads me to the question about whether a one-size-fits-all approach is the right way to go, meaning $15 may go further in a place like Amarillo, Texas, or Casper, Wyo., compared to Washington, D.C., or Los Angeles.

DUBE: As a practical matter in this country, we have a lot of variation in minimum wages. The role of the federal minimum wage, in my view, is to provide a floor - so to make sure that even places where minimum wage policies have not been passed, even though they're quite popular among voters in those states, there is a base.

CORNISH: The last time it was changed was - what? - 2009, which was another time following a financial crisis. But how is this moment different, and do you think that will make a difference in sort of whether or not we see a change this time around?

DUBE: So I think the pandemic has certainly highlighted how much at risk essential workers in supermarkets and low-paid sectors, generally in retail, have been. They have suffered a lot, and there hasn't really been consistent hazard pay. So I think those are really important things to keep in mind. At the same time, again, I think we need to be thinking more medium and long-term. No one is suggesting that we raise the minimum wage all the way to 15 immediately, or certainly most people are not. And so thinking about where do we want to be four or five years from now, and do we want to have a 7.25 federal minimum wage, I think, is sort of the starting point. And I think it would be a shame if we were not able to raise the federal minimum wage four or five years from now.

CORNISH: Arin Dube is an economics professor at the University of Massachusetts at Amherst. Thank you so much.

DUBE: Thank you for having me.

(SOUNDBITE OF TOM MISCH AND YUSSEF DAYES'S "KYIV") Transcript provided by NPR, Copyright NPR.