Working Paper: NBER ID: w26523
Authors: Sudheer Chava; Alexander Oettl; Manpreet Singh
Abstract: Do increases in federal minimum wage impact the financial health of small businesses? Using intertemporal variation in whether a state’s minimum wage is bound by the federal rate and credit-score data for approximately 15.2 million establishments for the period 1989–2013, we find that increases in the federal minimum wage worsen the financial health of small businesses in the affected states. Small, young, labor-intensive, minimum-wage sensitive establishments located in the states bound to the federal minimum wage and those located in competitive and low-income areas experience higher financial stress. Increases in the minimum wage also lead to lower bank credit, higher loan defaults, lower employment, a lower entry and a higher exit rate for small businesses. The results are robust to using nearest-neighbor matching and geographic regression discontinuity design. Our results document some potential costs of a one-size-fits-all nationwide minimum wage, and we highlight how it can have an adverse effect on the financial health of some small businesses.
Keywords: minimum wage; small businesses; financial health; credit score
JEL Codes: G33; G38; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal minimum wage increases (J38) | reduction in Paydex credit score (G32) |
| Federal minimum wage increases (J38) | increased financial stress (G59) |
| Federal minimum wage increases (J38) | exit probability of affected establishments (J63) |
| Federal minimum wage increases (J38) | lower bank credit availability (G21) |
| Federal minimum wage increases (J38) | higher loan defaults (G21) |
| Federal minimum wage increases (J38) | reduced employment (J63) |
| Federal minimum wage increases (J38) | lower rates of business entry (L26) |
| Federal minimum wage increases (J38) | financial stress for small businesses (G21) |