The highest costs are borne by companies with the lowest profits, since they employ the biggest share of low-paid workers
is supposed to redistribute money from rich to poor. But economists disagree about whether it actually does so. Some researchers, for example, have found that, in America, Canada and Europe, raising the minimum wage tends to decrease employment among the least-skilled workers, as firms downsize to trim costs. Others have found no effect on employment.
A new paper by Lev Drucker and Katya Mazirov of Israel’s Ministry of Finance, and David Neumark of the University of California, Irvine, examines increases in Israel’s minimum wage in 2006-08 in search of an answer. The more low-wage workers a company employed, they found, the more its profits declined. Companies with 60-80% of staff earning the minimum wage saw their profits cut by almost half.
Since business owners with low earnings relative to their peers are still relatively well off compared with the general population, raising the minimum wage is still progressive. But it may seem unfair, as low-income businesspeople pay, but richer business owners and better-off employees do not. Those lower-income bosses who were hardest hit by minimum-wage increases earned only about as much as many mid- to high-earning workers.
In some places, minimum-wage rules are designed to try to minimise the impact on low-earning firms. In America they apply only to businesses with sales exceeding a certain threshold. In South Korea, a minimum-wage increase in 2018 was accompanied by subsidies for small firms. The authors do not discuss how Israel’s lack of such provisions might affect their findings. But they do suggest using an employer tax credit to offset the disproportionate burden of minimum wages on low-income firms.
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