The Economic Impact of Biden’s 15 Minimum Wage Proposal on U.S. Businesses

President Joe Biden’s proposed increase to the national minimum wage to $15 per hour has undoubtedly stirred considerable debate among economists and policy-makers. One of the primary concerns is the proposed “one size fits all” approach to wage hikes. This article explores how such a drastic increase might affect businesses across different states, sectors, and types.

The Challenges of a “One Size Fits All” Minimum Wage

The current system, where wage scales vary significantly from one state to another, already presents considerable challenges. Some states (those deemed “expensive”) such as New York and California, are already approaching $15, while others (those deemed “cheaper”) like Mississippi and West Virginia are still at the federal minimum of $7.25. The proposal suggests that the wage should be doubled overnight in these lower-wage states. This rate is significantly below the average cost of living, with rental costs also varying greatly between states.

For example, average rents in San Francisco can be up to twice as expensive as in rural areas of Idaho. This means that a worker in a low-cost-of-living area currently earning $7.25 per hour would need more than a doubling to maintain the standard of living and cost of rent in an expensive state. The proposal would effectively create rapid inflation in cheaper states, as businesses and workers both try to keep pace with these new wage mandates.

Impact on Businesses

Small and large corporations will face distinct challenges.

1. Large Corporations: Major corporations like Amazon and Walmart, which operate on a national or even international scale, may be able to absorb these costs through automation and scale. However, small businesses in those same states may face a more uncertain future.

2. Small Businesses: For smaller mom-and-pop shops and independent businesses, the increase could be catastrophic. These businesses often operate on thin profit margins and may be forced to raise prices to cover the increased labor costs, making their goods and services less competitive.

3. Misaligned Economies: According to the analysis, some sectors and businesses could sustain this change, but others, particularly smaller ones, are likely to struggle. The unease comes from the current economic reality after years of lockdowns, where global giants like Amazon thrived while independent retailers struggled.

Three Variables That Determine Survival

The fate of businesses will depend on several key variables:

1. Location: Big, wealthy cities may have greater capacity to adapt, but rural areas and mid-range cities will likely face challenges.

2. Dollar Devaluation: If the dollar were to devalue, it could exacerbate the inflationary pressures, making the cost of living and operational expenses even higher.

3. Corporate Size: Larger companies with more significant market share and smaller competitors may have a greater chance of survival due to their size and capital.

These factors combined suggest that a significant number of small businesses will struggle, while some larger corporations could potentially thrive, albeit with smaller competitors impinging on their market share. However, the overall net impact is likely to result in reduced competition, particularly among small businesses.

Who Will Suffer Most?

The unskilled and the very young workers stand to suffer the most. Unemployment rates among individuals under 28 in Spain have soared in the past 25 years as a direct result of increases in the minimum wage, offering a stark example of the potential impacts. The incoming minimum wage increase could have similar ripple effects across the United States.

While the proposal may benefit a small subset of businesses, particularly large corporations, it is likely to have a negative impact on a broad spectrum of small businesses. Undoubtedly, the economic impacts will vary widely based on individual business circumstances, but the overall trend suggests significant disruption and distress for many businesses and workers.

Conclusion

The Biden administration’s proposed increase to the federal minimum wage is an expansive policy that could have far-reaching economic consequences. While large corporations may survive, small businesses and many workers, particularly those in the unskilled and young categories, could suffer. The economic landscape will be significantly altered, with likely winners and losers, and the true impact will only become clear as the policy is implemented and its ripple effects are observed.