Do Minimum Wage Increases Cause Financial Stress to Small Businesses? Evidence from 15 Million Establishments

Sudheer Chava, Alexander Oettl and Manpreet Singh of Georgia Institute of Technology. 

"Abstract

Do increases in federal minimum wage impact financial health of small businesses? Using inter-temporal variation in whether a state's minimum wage is bound by the federal minimum wage and credit-score data for approximately 15.2 million establishments for the period 1989-2013, we find that increases in federal minimum wage worsen the financial health of small businesses in the affected states. Small, young, labor-intensive, minimum-wage sensitive establishments located in bounded states and businesses located in competitive and low-income areas experience higher financial stress. Increases in minimum wage also lead to lower bank loans, a higher risk of loan default and higher exit rate for affected small businesses. The evidence suggests that some small businesses are unable or unwilling to pass-through costs to customers immediately and consequently experience financial stress. Our results document the costs to the one-size-fits-all nationwide minimum wage and highlight how the increases in minimum wages can have an adverse effect on the financial health of small businesses."