Does a One-Size-Fits-All Minimum Wage Cause Financial Stress for Small Businesses?
Sudheer Chava, Alexander Oettl, Manpreet Singh
NBER Working Paper No. 26523
Issued in December 2019
NBER Program(s):Corporate Finance Program, Labor Studies Program, Political Economy Program, Productivity, Innovation, and Entrepreneurship Program
Issued in December 2019
NBER Program(s):Corporate Finance Program, Labor Studies Program, Political Economy Program, Productivity, Innovation, and Entrepreneurship Program
Do increases in federal minimum wage impact the financial health of
small businesses? Using intertemporal variation in whether a state’s
minimum wage is bound by the federal rate and credit-score data for
approximately 15.2 million establishments for the period 1989–2013, we
find that increases in the federal minimum wage worsen the financial
health of small businesses in the affected states. Small, young,
labor-intensive, minimum-wage sensitive establishments located in the
states bound to the federal minimum wage and those located in
competitive and low-income areas experience higher financial stress.
Increases in the minimum wage also lead to lower bank credit, higher
loan defaults, lower employment, a lower entry and a higher exit rate
for small businesses. The results are robust to using nearest-neighbor
matching and geographic regression discontinuity design. Our results
document some potential costs of a one-size-fits-all nationwide minimum
wage, and we highlight how it can have an adverse effect on the
financial health of some small businesses.
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