Minimum wage can be a hot-button topic. The minimum amount of money that companies must pay their employees has a direct impact on the employees and companies themselves, which often causes a trickle-down effect on the economy, as a whole. In other words: everyone is affected by theminimum wage.

While the current Federal minimum wage is set at $7.25 per hour, different states may institute local minimum wages that are higher than the federal limit.[1] Colorado, for example, has a state minimum wage of $13.65 per hour,[2] and New York set theirs at $15 per hour.[3] (For more state-wide wage updates, check out the U.S. Department of Labor’s list of state minimumwage laws.)

For as much impact as the issue has, it’s in the best interest of small business owners to have a solid understanding of how any future minimum wage raises may impact their bottom line. Businesses should have a plan ready to institute quickly, should it become necessary to scale back on their spending to accommodate a rise in wages. Here are some of the basics.

Minimum Wage: A Short History

The Fair Labor Standards Act was passed in 1938. It created the Wage andHour Division, making the law of the land for businesses to offer a 40-cent-an-hour minimum wage, as well as a 40-hour workweek max. It also set 16 asthe minimum working age.[4]

The last time the minimum wage was raised was in 2009.[5] That makes the time between 2009 and the present the longest period without a minimum wage raise since the 1938 Fair Labor Standards Act went into law.

Increasing the Minimum Wage: Pros and Cons

On its face, raising the minimum wage might seem like a purely positive move, but the facts are more nuanced. According to the Congressional Budget Office,[6] while a rise in the federal minimum wage would undoubtedly increase the earnings of some families enough to bring them above the poverty level, other low-wage workers would likely be negatively impacted by small businesses that need to cut back on their workforces to survive an increase in wages.

It’s also important to note that academics have been conducting studies onthe impact of raising the minimum wage for years. Depending on how you’d like the argument to play out, you’re likely to find a study proving your point. Some studies have shown either minimal negative impacts[7] or none at all.[8] On the other hand, additional studies have shown that increasing the minimum wage caused a decrease in pay for the average minimum wage worker (because the stores where the minimum wage increased were forced to reduce the work hours available for hourly employees) and negatively impacted worker eligibility for benefits.[9]

Purely from a small business owner's perspective, here are some of the major pros and cons to consider.


Proponents of raising the minimum wage argue that the increase would provide a boost to low-wage workers and decrease the number of people living in poverty. One prominent government example was the Raise the Wage Act of 2021, which aimed to gradually raise the minimum wage to $15 by 2025. It was estimated to lift the pay of 32 million workers (or 21% of the work force) by allowing them to earn an extra $3,300 a year. Additionally, 59% of workers with a total family income that fell below the poverty linewould have received an increase in wages. These increases would have been particularly significant for workers of color, since 31% of African Americans and 26% of Latinos would have seen rises in their pay[10].

This influx of cash into the hands of citizens could also stimulate the overall economy. After all, a society that makes more money has more money to spend. Small businesses could see a rise in profits because of that.


One big fear of an increased minimum wage is the further inflation of labor costs for businesses.[11] Labor costs are broken down into the four categoriesof variable, fixed, direct, and indirect.[12]

  • Variable labor costs: Includes hourly employees and are based on thetotal amount of output
  • Fixed labor: Includes salaried workers whose costs remain the samedespite any fluctuations
  • Direct labor: Involves employees who are responsible for theproduction of a product or service within a company (i.e., assembly lineworkers or delivery drivers)
  • Indirect costs: Can’t be traced to an individual service or productprovided by the company (i.e., maintenance staff or admins)

The distinction between each of these will come into play in the next sectionwhen we talk about how companies can create a plan to mitigate the impactsof minimum wage increases.

What Can Businesses Do?

With the major pros and cons in mind, small businesses can start brainstorming ideas for how to weather any wage changes coming their way.

One of the quickest — but certainly not the easiest or most worker-friendly —ways to lessen the impact of an increase is to reduce labor costs and/oremployee benefits offerings. This can be done by decreasing the number ofhours available for hourly employees or, unfortunately, by laying off salariedstaff members. But layoffs should obviously only be taken as a last resort.Businesses may also cut back on direct labor costs by lowering their level ofproduction (thereby reducing some of the overhead associated with thosecosts) — or by reducing indirect labor costs (by getting rid of certain adminprograms, for example).

Another option is to pass increased costs off to the consumer. An increase in costs for certain products and services may cause some customers to rethink how much they spend at certain businesses. On the other hand, an increase in overall wages may help combat worries about overspending and keepconsumers coming back for more, regardless of rising costs.

Business owners should be prepared to deal with an increase in the minimum wage — whenever it occurs — as well as the possible effect on their labor costs and employment policies and practices. For additional advice on how tonavigate rising employee costs and keep your company flourishing, check out PNC’s small business hub.