The mouse in the room: Small business fetish and the minimum wage debate

The scrappy mom-and-pop shop may be a nice image, but how well does it reflect the reality of employment? Small business may be neither as ubiquitous nor economically heroic as many people think. If this is the case, then perhaps the needs of small business should not figure as prominently in some economic policy debates. The minimum wage debate is a case in point.

This line of thinking arose from an older piece by the excellent Doug Henwood, which questions the nearly universal platitudes directed at small business. Doug writes,

[S]mall business often serves an ideological purpose. On the right, it’s deployed to resist any political impulses to regulate business or push up wages. That implicitly concedes that smaller firms are nastier to work for, but it’s also a bit devious, since McDonald’s probably would suffer at least as much from a minimum wage increase as Mom’s Burger Shack would. Here, small business becomes a virtuous stand-in for business as a whole, since small business probably has a better public image than the big, no matter how ill-deserved. Even if this is a devious move, it’s not much of a surprise.

…And people who presumably care about workers should also rethink their passion for tininess: the experience of actually existing small businesses show that they’re not great employers, with poor pay, cheesier benefits and more dangerous workplaces. Bigger firms are easier to regulate, more open to public scrutiny, friendlier to affirmative action programs and more vulnerable to union organizing.

A progressive case for bigness is rare and unpopular these days, but somebody has to make it.

These thoughts are very relevant for the minimum wage debate, which often pits small business against low-wage workers. This was made explicit in Ontario, where the NDP recently proposed to raise the minimum wage while simultaneously cutting taxes on small business. Before moving on, however, here are some updated statistics on business size in Canada and Ontario.

Table 1.  Size of small business and large firms as a percentage of total employment (Source: Statistics Canada, CANSIM 281-0042).
Table 1. Size of small business and large firms as a percentage of total employment (Source: Statistics Canada, CANSIM 281-0042).

Small business, even under the broader definition of 100 or fewer employees (see Note 1 below), accounts for barely a third of employment in Canada or Ontario. This proportion has been quite stable since at least the turn of the millennium: in 2001, small businesses (<100) employed an almost identical 32% of Canadian workers. So, while the number of small businesses is naturally much larger than that of large firms, the relative role of small business in the economy is not quite as sizeable.

Furthermore, small business accounts for a shrinking proportion of all minimum wage workers (see this chart from Armine Yalnizyan of the CCPA). At present, almost half of minimum wage earners work for large firms with over 500 employees: 45% Canada-wide and 48% in Ontario. Finally, this means that minimum wage earners account for just 7% and 9% of employees at SMEs in Ontario and Canada respectively.

Where does this leave us? First, the stability of the share of employees working for small businesses contradicts the picture of small business as a special driver of job growth. Second, if the share of minimum wage earners working at large firms is now exactly the same as the share of all employees working at large firms, then there appears to be less of an argument for especially privileging small business in minimum wage policy. This is in addition to the broader argument that it is dangerous and irresponsible to tie minimum wage increases to tax cuts.

In the minimum wage debate, the appeal to the struggling mom-and-pop shop serves a largely ideological function – in line with Doug Henwood’s general thoughts. The plight of small business is, at best, trotted out to obfuscate the fact that large firms are now responsible for almost half of minimum wage employment. At worst, it is used as an excuse to deepen regressive tax policy and make wage increases for the working poor conditional on further starving the public revenues they rely on the most.

The latest research suggests that raising the minimum wage provides a decisive net benefit to working people. This same research proposes multiple channels – lower turnover, higher efficiency from better training or wage compression between lower- and higher-paid employees among others – through which minimum wage increases can be absorbed by firms and which explain the observed relatively small decreases in employment and/or hours.

The economy is about choices, as the right loves to point out. Capitalism is a system of creative destruction and it chooses winners and losers ruthlessly whenever policy or conditions change. Just as minimum-wage workers are now struggling below the poverty line, some businesses may struggle with the fact that they are no longer able to pay poverty wages. But businesses, small and large, will adapt to minimum wage increases where they can. And even if more large businesses come out on top, Doug Henwood gives us reasons to not bemoan the fact. A misplaced fetish for small business should not be a stumbling block to very badly needed raises for the lowest-paid in Ontario and across North America.

Note 1: There is no one universally-accepted definition of small business, but two reasonable definitions from Industry Canada describe a business as small if it has either under 50 or under 100 employees. The more general category of SME (small- and medium-sized enterprise) is one whose members employ under 500 people, leaving large enterprises as those with over 500 employees.

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