Proposals to raise the minimum wage are often met with arguments that independent businesses may be vulnerable to such increases. In a new study, “ Who’s Afraid of the Minimum Wage? Measuring the Impacts on Independent Businesses Using Matched U.S. Tax Returns ,” researchers examined how small and medium-sized firms accommodated minimum wage hikes along product and labor market margins. The study found that firms reacted to increases in minimum wage differently depending on their size, but most adapted well, and the effect on workers was also largely positive.
Conducted by researchers at Carnegie Mellon University and the University of Michigan, the study is published in The Quarterly Journal of Economics .
“Although recent research has found that minimum wage increases have had few harmful effects on employment in the short run, fears that independent businesses operate on margins too slim to accommodate cost increases or face demand too elastic to pass costs to consumers have motivated small business exemptions and opposition to raising wage floors,” explains Max Risch, Assistant Professor of Accounting at Carnegie Mellon’s Tepper School of Business, who coauthored the study.“At the same time, surveys repeatedly find that independent business owners are divided on minimum wage policy, with large shares actually supporting higher wage floors.”
Researchers used a data set drawn from U.S. tax records from 2010 to 2019, state minimum wage changes, and data on low-earning and young workers (who may be most vulnerable to adjustments in wages). They measured responses from 217,000 firms across several margins, including employment, compensation to different types of workers, expenditures on non-labor inputs, revenues, profits, and firms’ exit and entry. Among the study’s findings:
“Amid limited understanding of how markets adjust to accommodate wage hikes, our study offers a comprehensive examination of this issue, informing the debate on how U.S. independent firms respond,” says Nirupama L. Rao, Assistant Professor of Business Economics and Public Policy at the University of Michigan’s Ross School of Business. “Contrary to concerns that such wage increases might imperil small firms, independent firms demonstrate remarkable adaptability.”
The study was supported by the Washington Center for Equitable Growth.
The Quarterly Journal of Economics
Who’s Afraid of the Minimum Wage? Measuring the Impacts on Independent Businesses Using Matched U.S. Tax Returns
28-Feb-2026