Does A One-Size-Fits-All Minimum Wage Cause Financial Stress For Small Businesses?

80 Pages Posted: 11 Jul 2019 Last revised: 20 Nov 2019

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Alexander Oettl

Georgia Institute of Technology - Strategic Management Area

Manpreet Singh

Georgia Institute of Technology

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Date Written: March 15, 2018

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: Small Business, Financial Distress, Minimum Wage, Credit Score

JEL Classification: G33, G38, J30

Suggested Citation

Chava, Sudheer and Oettl, Alexander and Singh, Manpreet, Does A One-Size-Fits-All Minimum Wage Cause Financial Stress For Small Businesses? (March 15, 2018). Georgia Tech Scheller College of Business Research Paper No. 19-13, Available at SSRN: https://ssrn.com/abstract=3417840 or http://dx.doi.org/10.2139/ssrn.3417840

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Alexander Oettl

Georgia Institute of Technology - Strategic Management Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Manpreet Singh (Contact Author)

Georgia Institute of Technology ( email )

800 W Peachtree St NW
Room 4162
Atlanta, GA 30308
United States
+14043855330 (Phone)

HOME PAGE: http://www.manpreets.com

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