INTRODUCTION

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The issue of a minimum wage has always been surrounded by great controversy and emotion. The image of the exploited worker, victimized by "big business" and a rising cost of living, has usually invoked support of minimum wage proposals in the Congress.

The issue is very similar in principle to usury. Proponents of lower regulated rates on consumer loans would have us believe that everyone would be better off with such controls, when, in fact, only those who are deemed eligible for credit at the lower rates benefit. Others are either denied credit or are forced to find more expensive sources of credit. So it is with a minimum wage: those who can work at the higher minimum indeed benefit, while others will be excluded from the job market because of it. And, if producers are forced to raise prices to cover the increased costs of labor, we all pay the price, including those who cannot find work.

The empirical evidence on the subject is mixed. Nature rarely provides a perfectly controlled experiment, especially in the areas of social behavior, and the minimum wage issue is no exception. Laborsaving technological change and the ability of producers in many industries to pass on increased costs to the consumer confound estimates of the impact of a minimum wage. Business cycles and variations in the enforcement of the law further blur the distinctions we would like to make. Some segments of the economic community are well organized and can provide more information about the possible impact than others. We are rightly concerned about the long-run as well as the short-run effects of such legislation. Much carefully structured research is needed in order to isolate the long-run impact of changes in the minimum wage.

In the short-run, the effects may not be readily observed, especially where the demand for labor is fairly insensitive to its price over fairly wide ranges. Yet our chances for measuring direct short-run changes are considerably easier to trace and document.

One community in the economy that is not well organized due to its diversity and size is the independent business community. Here, we find each firm having relatively few employees but providing the variety of goods and service that are a part of our living style today. Moreover, these firms generate the bulk of employment opportunities in most communities. In order to provide some more objective and factual information about how these businesses might be affected by a change in the minimum wage and to collectively present their views, the National Federation of Independent Business recently undertook a study of its approximately 335,000 members.

The study had two basic thrusts:

1. To obtain information about the distribution of employees by wage rate for these small firms. This factual information should be descriptive of most small businesses similarly situated, whether a member of the Federation or not.

2. To record the reaction of owners of small businesses to proposed changes in the minimum wage law and assess the likely response of these firms to any change.

The findings from this study are based on the response of 2,529 firms in the wholesale/retail trade and service industries drawn in a random sample of the Federation's membership More details on the sampling methodology are given in the Appendix.

THE FINDINGS

The first three tables in the report illustrate the cost exposure of small businesses in the wholesale/retail trade and service industries. These firms are generally quite labor intensive, and, consequently, labor costs are a large part of their total operating costs. Thus, a change in the minimum wage might be expected to have a major effect on the cost of operation for these firms if a significant proportion of their employees earn less than any established new wage minimum.

Table I indicates that, in general, the smaller the firm's annual sales, the larger will be the proportion of its work force earning under $2.20 per hour, the proposed minimum in last year's Senate bill. It would be incorrect to conclude from this Table that smaller

businesses are exploiting their labor. These businesses usually serve markets and provide services that are different both in nature and degree than large firms, and accordingly require workers with different skills and levels of education. Many of these workers would not qualify for the complex industrial jobs that typically pay high wages.

The effect of the current $250,000 sales exemption from the minimum wage is clear in Table I. Few firms with annual sales higher than $250,000 employ workers for less than the current minimum, those being part-time workers generally. Table I shows that part-time employees would be particularly affected by an increase in the minimum with as many as onethird of them currently earning less than $1.60 per hour.

Table II summarizes the exposure of firms in the study to changes both in the minimum wage and the sales exemption. In Section A, we find that an increase in the minimum wage to $2.00 per hour would affect 21 percent of the employees working for these firms. An increase to $2.20 would extend coverage to 30 percent of their employees and require hourly increases of as much as 60 cents per hour.

Section B, which measures a change in the sales exemption alone, shows there would be little effect on small businesses. Although 63 percent of the firms in this study come under the present sales exemption, lowering the sales exemption to $150,000 per year would affect at most 1 percent of all employees working for all firms (5 percent if the exemption is eliminated). For firms below the $150,000 exemption, however, the potential effect is much larger as 13 percent of their work force now earning under $1.60 per hour would be subject to minimum wage (some, of course, would receive student exemptions and still be employable at less than $1.60 unless the student exemption were also eliminated).

In a labor-intensive business, the effect on wage costs of such a change would be relatively large.

to $150,000

If the sales exemption is reduced 1 annual sales and the minimum wage is raised as is posed in Section C, effects are much larger. Finally, elimination of the exemption and raising the minimum to $2.20, as shown in Section D, would directly affect over 50 percent of the work force employed by these firms! There would, of course, be pressure to alter the entire wage scale so this percentage likely underestimates the total effect such a change would have. Cost increases of the magnitude implied by these percentages would be very difficult for such businesses to handle.

1 It should be noted that a sales exemption set in dollar terms continues to drop in effect each year during periods of inflation. A $250,000 business in any given industry does not sell the same physical amount of merchandise now that a $250,000 volume firm did in 1965. Assuming 6 percent inflation per year, a firm with $250,000 in sales in 1965 that sold the same physical volume this year would have sales of nearly $400,000. Thus, each year, as inflation has increased, firms have come under the minimum wage restriction even though their businesses have not grown.