A wrinkle in the minimum-wage debate: Lower-income bosses bear the burden

A minimum wage is supposed to redistribute money from rich to poor. But economists disagree about whether it actually does so.

Some researchers, for example, have found that, in America, Canada and Europe, raising the minimum wage tends to decrease employment among the least-skilled workers, as firms downsize to trim costs. Others have found no effect on employment.

And although no one doubts that the policy raises wages for the workers who stay employed, still unsettled is the question of where that extra money comes from.

A new paper by Lev Drucker and Katya Mazirov of Israel's Ministry of Finance, and David Neumark of the University of California, Irvine, examines increases in Israel's minimum wage in 2006-08 in search of an answer. The more low-wage workers a company employed, the more its profits declined. Companies with 60-80% of staff earning the minimum wage saw their profits cut by almost half.

The researchers' central insight is that firms with relatively low profits disproportionately employed minimum-wage workers, meaning those firms ultimately bore the greatest burden of mandated higher wages.

Poorer business owners, in short, suffered bigger losses. Those with median incomes (for the population at large) took a profit hit 8% larger than those at the 75th percentile.

Since business owners with low earnings relative to their peers are still relatively well off compared with the general population, raising the minimum wage is still progressive. But it may seem unfair, as low-income businesspeople pay, but richer business owners and better-off employees do not.

Those lower-income bosses who were hardest hit by minimum-wage increases earned only about as much as many mid- to high-earning workers. And a higher minimum wage is less progressive than raising taxes, which fall most heavily on the best off, in order to fund tax credits for the poor. America's earned income tax credit works along those lines.

In some places, minimum-wage rules are designed to try to minimize the impact on low-earning firms. In America they apply only to businesses with sales exceeding a certain threshold. In South Korea, a minimum-wage increase in 2018 was accompanied by subsidies for small firms. The authors do not discuss how Israel's lack of such provisions might affect their findings.

But they suggest using an employer tax credit to offset the disproportionate burden of minimum wages on low-income firms. Policymakers aiming to fight poverty and increase equity with minimum wages would do well to consider unintended effects.

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.