UNIVERSITY PARK, Pa. — Research conducted by Matt Gustafson, Penn State Smeal associate professor of finance and Stuart and Michele Rothstein Early Career Professor, reveals that, particularly in industries most exposed to minimum-wage labor, minimum wage increases lead these firms to cut capital expenditures.
In recent years several states — including California, Illinois, Maryland, Massachusetts, New Jersey, New York, as well as Washington D.C. — have passed laws to increase their minimum wages to $15 per hour — more than double the current federal rate of $7.25.
“This movement has created immense political pressure to raise the federal minimum wage,” said Gustafson. “But policy debates are complicated because the effect of higher minimum wages on businesses and low-wage workers remains uncertain.”
In a recent research paper published in Management Science, Gustafson, along with Jason D. Kotter, assistant professor of finance at Brigham Young University, examined the effect of minimum wages on the capital expenditures of U.S. public firms. They report that, particularly in industries most exposed to minimum-wage labor, minimum wage increases lead these firms to cut capital expenditures.
In the United States, the industries that employ the most minimum-wage workers by far are retail, restaurants and entertainment. In fact, in 2012, the Current Population Survey used in the study showed that retail, restaurant and entertainment employ over 70% of minimum wage labor, with no other industry employing over 10%. (2012 was the final year of the researchers’ sample, and there hasn’t been a federal minimum wage increase since 2009.)
“We found that when the minimum wage is raised and therefore labor costs go up, these companies are going to take on fewer capital expenditures as investment projects,” Gustafson says. “One of the main ways in which restaurants, stores, and entertainment venues invest is in new establishments. Our research showed that as a state’s minimum wage goes up 10% to 20%, these businesses will invest in fewer establishments in that state in the subsequent year or two. So, let’s say there are 10 people thinking about opening up a second store. One or two of them will decide not to — they’ll cancel or delay that new establishment — because of that minimum wage hike.”
In the United States, each state is required to follow federal minimum wage law. But states can also pass their own laws to make the wage higher than what federal law dictates. Gustafson emphasizes that his research focuses on states that don’t have their own minimum wage laws and therefore must change their minimum wage according to federal mandate. For these states, if the federal government increases the minimum wage from $7.25 to $8, the decision is made for them. In contrast, states that already have their own minimum wage established — $12 or $15, for example — won’t be affected.