A proposal championed by Rep. Alexandria Ocasio-Cortez to establish a $25 federal minimum wage is raising concerns among economists about its potential impact on small businesses, particularly in states with lower existing wage floors.
The significant increase from the current $7.25 federal minimum wage could present substantial challenges for businesses in “red states,” where wages are often closer to the federal baseline. Economists suggest that absorbing such a rapid rise in labor costs could lead to increased prices for consumers, reduced hiring, and broader economic strain for these businesses.
“Many believe raising the minimum wage will solve everything, that wages will go up while prices stay the same,” Santiago Vidal Calvo, a policy analyst at the Manhattan Institute, explained to Fox News Digital. “But that’s Econ 101, it doesn’t work that way.” He cautioned that the proposal might negatively affect younger and lower-income workers as companies seek to offset higher labor expenses through measures like reduced hours, job cuts, or increased automation.
Rebekah Paxton, research director at the Employment Policies Institute, noted that opposition to substantial minimum wage hikes is common among economists. “We surveyed more than 160 American economists and found that 96% opposed proposals above $20 an hour,” Paxton stated, highlighting particular concern for industries with thin profit margins, such as hospitality and restaurants, where job losses and operational difficulties could arise from increased labor costs.
Nicole Huyer, a senior research associate at the Thomas A. Roe Institute for Economic Policy Studies, added that these pressures might compel businesses to make difficult choices. “Small businesses will look to cut costs by any means necessary,” Huyer said. “That includes raising prices, laying off workers, cutting hours or relocating altogether.”
The federal minimum wage has remained stagnant at $7.25 per hour since 2009. In contrast, several states have implemented minimum wages exceeding $15 per hour, creating a growing disparity between higher- and lower-wage economies. States like California and New York now mandate minimum wages above $16, while others, including Texas and North Dakota, adhere to the federal minimum.
Economists also foresee a potential acceleration of automation in sectors like retail and fast food, where entry-level positions are prevalent and profit margins are often tight. Small business owners in lower-wage states are seen as particularly vulnerable due to typically tighter margins and a reduced capacity to absorb sudden cost increases compared to businesses in higher-cost regions.
As proposals to raise the federal minimum wage continue to gain attention, the debate is expected to intensify regarding the feasibility of a single national standard that accommodates diverse state economies, versus leaving wage policy decisions to individual states.
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