Minimum Wage In Israel Impacts Smaller Firms

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Research has found that increased minimum wages hurts businesspeople with lower incomes.

To be clear, business owners typically make the same amount of money as mid to high wage earners. Implementing a minimum wage is still a progressive policy. However, a paper recently published by Lev Drucker, Katya Mazirov and David Neumark found that firms that earn less relative to other business disproportionately hire minimum wage staff.

The research evaluated the impact of an increased minimum wage in Israel. If a firm had an employee base where 60-80% were making minimum wage, the policy change cut profits by nearly 50%.

A minimum wage is evaluated as a policy that is less progressive than an increase in taxes. An increase in income taxes typically effect the highest earners the most. In terms of the minimum wage increase in Israel, business owners with a median income had a loss in profits that was 8% larger than losses experienced by business owners in the 75th percentile.

Policy increasing minimum wage can be designed to not impact business owners with relatively lower incomes. For example, in the U.S. the minimum wage is only applicable to firms who exceed a particular threshold in sales.

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Economics, Finance and Investing

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