The minimum wage has recently increased in 21 states, sparking a mix of reactions from small businesses. While some owners express concern about higher labor costs, others see opportunities for growth and adaptation. Let's explore the potential impacts and how small businesses are responding to these changes.



The Challenge of Higher Labor Costs

Small businesses often operate with tight margins, making it difficult to absorb higher labor costs. A survey by Kabateck Strategies (2025) found that 74% of small business owners said a federal minimum wage increase to $15/hour would have negative impacts. These businesses may face tough decisions, such as raising prices, cutting staff hours, or adopting technology solutions to reduce the need for labor.



Adapting to the New Reality

Despite the challenges, many small businesses are finding ways to adapt to the minimum wage increase. A study by UC Berkeley economist Michael Reich (2023) found that small businesses in the low-wage retail sector generally do not cut jobs and may actually benefit from higher minimum wages. This suggests that businesses can pass on the costs to consumers with little negative impact.

One way businesses are adapting is by increasing revenues to cover higher labor costs. Rao and Risch (2024) found that firms are able to increase their revenues sufficiently to fully cover the new higher labor costs, with no reduction in profits among surviving firms on average. Effectively, the higher wages are fully financed by consumers rather than small business owners or by reductions in compensation for higher-earning workers.

The Impact on Job Creation and Retention

While some businesses may struggle to absorb higher labor costs, the overall impact on job creation and retention is likely to be limited. Rao and Risch (2024) found that firms do not engage in layoffs but offer slightly fewer part-time jobs in a year following minimum wage increases. This results in about 1.5 fewer employment relationships per firm per year, driven exclusively by jobs paying less than $4,000/year, largely held by teenage workers. On average, the workforce remains largely unchanged, though a few part-time teenage jobs are no longer offered at the new higher wage level.

The Role of Automation and Technology

A minimum wage increase could influence the adoption of automation and technology by small businesses. With higher labor costs, investing in automation could become more attractive, as it can reduce reliance on a large staff and lower overall labor costs (Rao and Risch, 2024). However, this could also lead to job losses, particularly for teenage workers. Research has shown that higher wages often allow teenage employees to work a little less and study more (Reich and Wursten, 2023).

A Balanced View

While the minimum wage increase presents challenges for small businesses, it also offers opportunities for growth and adaptation. By increasing revenues and passing on costs to consumers, businesses can maintain profitability and even benefit from higher minimum wages. However, it is essential for policymakers to consider the unique circumstances of small businesses when implementing wage policies to foster both economic growth and worker well-being.

In conclusion, the minimum wage increase in 21 states is a mixed bag for small businesses, presenting challenges and opportunities alike. By understanding the potential impacts and adapting their strategies accordingly, small businesses can navigate these changes and continue to thrive.