Does a One-Size-Fits-All Minimum Wage Cause Financial Stress for Small Businesses?

Abstract

Using intertemporal variation in the bounding of a state’s minimum wage by the federal rate and business credit-score data for 15.2 million establishments, we find that the increase in labor costs caused by a higher federal minimum wage leads to lower business credit scores and worsens the financial health of small businesses in the affected states. In particular, small, young, labor-intensive, and minimum-wage-sensitive establishments located in affected states and those located in competitive and low-income areas experience higher financial stress. Increases in the minimum wage are associated with employment reductions and a higher exit rate for small businesses. Our results document some potential costs of a one-size-fits-all nationwide minimum wage for some small businesses. This paper was accepted by Gustavo Manso, finance. Funding: This work was supported by the Ewing Marion Kauffman Foundation Junior Faculty Fellowship. Supplemental Material: The data and internet appendix are available at https://doi.org/10.1287/mnsc.2022.4620 .