The Big Impact of Small Business

Kenneth Waltz revolutionized the way international relations scholars approach conflict in international relations theory with his 1959 book "Man, the State, and War". Waltz claimed that theories fell into one of three explanations; government-level explanations, individual-level explanations, and system-level explanations. He noted that explanations of war were more or less persuasive depending on the actor in focus (or "unit of analysis"). Focusing on different actors at different levels could obscure or highlight different problems related to war theorizing. The "units of analysis" concept has utility outside of conflict theory. The debate over minimum wage is overwhelmingly discussed in terms of its impact on individual people. Proponents of the minimum wage tend to argue that it will help individual people escape poverty, that peoples' spending will spur growth, and people will not lose jobs from the minimum wage. Opponents of the minimum wage tend to frame their impact articulation in similar terms – people will lose jobs, people will spend less, people's job quality will decrease. As with war theory, focusing exclusively on individuals as the unit of analysis has analytical limitations. This article will begin with a different starting point and a different unit of analysis – the business. While businesses are discussed in the minimum wage literature, they are usually a secondary afterthought relevant to the extent they impact people; more/fewer people are employed by businesses, people will leave/stay at their business, and the like. Instead of treating the business as an afterthought, this article will foreground the business and outline a framework that amounts to "business impacts first". Since the limited literature that discusses the impact of minimum wage on (small) business tends to focus negative, this article will assume the debaters reading the business first framework are on the negative. That doesn't make it impossible to read a "business first" aff – but it does mean the aff would have to find evidence indicating the minimum wage was net beneficial for businesses. Since the most persuasive justifications for the minimum wage emphasize the inhumanity of poverty, the affirmative literature is disproportionately scant on the subject. Nonetheless, to facilitate use by aff and neg debaters this post will split its analysis into two parts; the first part arguing negative business impacts, and the second part arguing that business impacts should come first. An affirmative who wants to read business first can draw from the second half of the post while ignoring the first. The business first framework (or "BFF") has the potential to be highly strategic on the NCFL topic (the BFF can be your BFF). Since most impacts are delineated in individual terms, a framework which establishes "businesses first" can streamline rounds by makes those individual impacts irrelevant. That makes the debate easier for the debater reading the businesses first framework, because they simply must win their framework to win the remainder of the debate. It also gives them two places to win; framework, and then the substance of their contentions. While there are arguments demonstrating the minimum wage is economically hostile to all business, there are reasons to believe minimum wage laws uniquely target small business.

Minimum Wage, Minimum Flexibility

The defining characteristic of small businesses is precisely that – they are small. Such businesses not only cater to narrow(er) audiences and employ fewer people, but also have smaller margins of profit. Unlike large corporations which have millions or billions of dollars keeping them in the black, small businesses are never far from the bankruptcy threshold. Startup failure numbers reflect the precarious situation in which small business owners find themselves; "over 90% of businesses fold within the first few years"¹. While some of that is doubtlessly due to poor management or ineffective business models, that shockingly high rate necessarily speaks to the difficulty of gaining and maintaining a customer base. Smaller size also means that these businesses have less capital to cover losses when they are hit with economic shocks or rapid losses. That's why economic downturn and decline tends to hit small businesses first². Each time the United States experiences economic doldrums, thousands of small businesses "go under"³. Certain industries like food service – whose customer base is less predictable and less consistent – are especially vulnerable to rapid economic costs, which is why restaurants have the "highest rate of failure of any business type"⁴. Even incrementally accumulated costs can be sufficient to sink a small business after a certain threshold⁵. Because of their vulnerability, "the minimum wage can drive some small companies out of business"⁶. The myth that "businesses have endless supplies of cash and can easily withstand minimum wage increases or other cost increases" is "simply not the case"⁷. Not only do small businesses struggle to remain above water, they must also out-compete national chain stores at the same time. An example is illustrative⁸:

Imagine a small neighborhood hardware store. This hardware store isn't going to have the logistics and economy of scale advantages of say, Wal-Mart; thus, it must charge more. It probably makes up the price difference with better service. When you raise the minimum wage, it increases the operating costs for that hardware store even more. Thus, it must raise it's prices to cover costs. Eventually, prices get so high that customers conclude that shopping there isn't worth the additional cost. Slowly, the local hardware store is driven out of business.

Chain stores have larger profit margins, and therefore larger capital shock buffers. Those buffers afford them flexibility that small businesses simply do not have. In response to a minimum wage increase, Wal-Mart has a diverse set of options because of its profit margins. In fact, because of the scale of its operations, Wal-Mart could absorb the entire cost of wage increases by insubstantially decreasing the pay of its executives. Small businesses do not have similar profit largesse, and often fail as a result of costs like minimum wage increases.

Limited Liquid: The Capital Question

Large corporations possess another advantage over small businesses that the minimum wage exacerbates: liquid capital. The process of starting a business, then keeping it in successful is difficult, taking "dedication, commitment, skill, risk, patience, and – perhaps most important – access to capital"⁸. Business owners generally – and small business owners specifically – have an immense need for liquid capital during initial start up, and then subsequent expansion, because costs are often frontloaded. Businesses don't start making money until they've spent a lot of money. For a highly limited example, take a restaurant startup; a restaurant has to find a location, secure that location, hire a lawyer to make sure that transaction is legal and fair, find industrial cooking equipment, purchase that equipment, install the equipment, contract to purchase the food, have a(nother) lawyer review that contract, design advertisements, spread those advertisements, hire a(nother) lawyer to ensure conformity to health and building standards, interview employees, hire employees, and then it can begin to make some of that money back. For small businesses, that money usually comes from loans from financial institutions. Those loans are highly competitive, though, and highly limited because of the present economic climate. Indeed, "[a]ccess to capital is simultaneously critical and difficult for both aspiring entrepreneurs and existing small businesses to obtain, especially as the business grows, a dynamic that has grown more acute since the financial crisis and throughout the tepid, uneven economic recovery"⁹. In those early stages, very small amounts of money can be the difference between defaulting on a loan or paying it, and can make or break a business. Businesses are expected to do more with less in the wake of the recession, as "commercial small-business lending" has begun to decline "because of tighter lending standards"¹⁰. Where lending does occur, it occurs at higher interest rates and with less repayment flexibility, further constricting the options available to small business owners¹¹. Data from the National Small Business Association shows a full 25% of businesses lack the "much-needed financing" to take measures that would allow them to stay solvent¹². For these underfunded companies, minimum wage laws – and increases in the minimum wage – can be a death knell. These aspiring businesses simply do not have the capital to pay the inflated wages set by the federal government. Minimum wage laws put small businesses in a catch-22; spend money they don't have, or do without labor they rely on. The result of these laws is the overwhelming failure of small businesses within a few years of opening¹³.

Business First Framework

Business impacts should be prioritized over all other impacts for two reasons; first, because small businesses are the single biggest driver of the American economy. Second, because small businesses have a controlling impact on all other major drivers of US economic growth. Small businesses have an enormous impact on the economy. Though many politicians hammer the significance of small businesses as part of a political strategy, "the stump speech rhetoric is real"¹⁴. Our market system has "small businesses" as "the backbone of the American economy"¹⁵. [T]oday over half of America's workers either own or work for a small business, and small businesses have generated 64 percent of net new jobs over the past 15 years. Small businesses create two out of every three new jobs in America Not only do small businesses provide the vast majority of jobs in the United States, they also facilitate the "economic development" and integration of local markets into larger economic markets¹⁶. Because small businesses rely on labor markets outside of their local community, they create positive economic externalities that tie the growth of local labor markets into broader state and national markets¹⁷. In that sense, the literally hundreds of thousands of small businesses collectively play a pivotal role in shaping the health of the US economy. For that reason, the health of small businesses is the biggest predictor of US economic growth¹⁸. The integration of small businesses into broader markets goes beyond American markets, though¹⁹. It's not uncommon for small businesses that provide a digital service rather than a good to customers in our major trading partners²⁰. Even small businesses that sell goods have statistically significant levels of sales abroad²¹. In that sense, the economic health of small businesses does not merely control the health of the US economy – it also controls the international economy²². The "spillover effects" that result from "increasing business confidence" in the United states can be "expected to stimulate domestic activity into the world, including Europe"²³. That matters to this topic, even though it only discusses the US economy, because the health of our major trading partners has a feedback effect on our economy. Because of the extent of economic interdependence, the economic performance of our allies is closely tied to our economic performance. When our allies do well, they lift us up. When they do poorly, they pull us down. Small businesses thus have a twofold effect on the US economy; directly through their spending and employment, and indirectly through the positive externalities they create for our allies. The size of the impact is likely sufficient to outweigh any other economic impact. Debaters reading this framework do not have to settle for that, though, because small businesses control most of the impacts the affirmative will cite as well. Since small businesses employ the majority of the workforce²⁴ and create the majority of new jobs²⁵, and meaningful discussion of job numbers rests fundamentally on the discussion of small businesses. The same is true of stimulus spending; small businesses inject the majority of capital into the US economy through spending²⁶. Small businesses thus have a controlling effect on both jobs and stimulus spending. When approaching this topic, make sure to argue both the "outweigh" portion of the claim and the "impact subsumes" portion of the claim. Doing both gives the judge two places to vote for you before evaluating the arguments made by your opponents, which is both a tactical advantage substantively and rhetorically.

Works Cited

1. Messerli, Joe. "Should the Minimum Wage Be Abolished (i.e. Reduced to $0.00)?" Balanced Politics. November 19, 2011. http://www.balancedpolitics.org/minimum_wage.htm
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.
7. Ibid.
8. Solomon et al. "Financing for small businesses is fuel for economy". Politico. March 5, 2013. http://www.politico.com/story/2013/03/financing-for-small-businesses-is-fuel-for-economy-88455.html#ixzz2zfSXkxjM
9. Ibid.
10. Ibid.
11. Ibid.
12. Ibid.
13. Ibid.
14. Ibid.
15. Donovan, Shaun. "Small Businesses, the Backbone of the American Economy". U.S. Department of Housing and Urban Development. November 27, 2013. http://blog.hud.gov/index.php/2013/11/27/small-businesses-the-backbone-of-the-american-economy/#sthash.vDny3RQE.dpuf
16. Ibid.
17. Ibid.
18. Harrison, J.D. "Small businesses keep fueling the economy, post largest jobs gains in nearly two years". Washington Post. January 8, 2014. http://www.washingtonpost.com/business/on-small-business/small-businesses-keep-fueling-the-economy-post-largest-jobs-gains-in-nearly-two-years/2014/01/08/4df5f426-7880-11e3-af7f-13bf0e9965f6_story.html
19. Colvin, Rhonda. "The Cost of Expanding Overseas". The Wall Street Journal. February 26, 2014. http://online.wsj.com/news/articles/SB10001424052702304071004579407220698124690
20. Ibid.
21. Ibid.
22. United Nations Economic Commission for Europe. "United States: leading the global recovery". Economic Survey of Europe No. 1. May 2, 2002. http://www.unece.org/press/pr2002/02gen12e.htm
23. Ibid.
24. Solomon et al. "Financing for small businesses is fuel for economy". Politico. March 5, 2013. http://www.politico.com/story/2013/03/financing-for-small-businesses-is-fuel-for-economy-88455.html#ixzz2zfSXkxjM
25. Ibid.
26. Donovan, Shaun. "Small Businesses, the Backbone of the American Economy". U.S. Department of Housing and Urban Development. November 27, 2013. http://blog.hud.gov/index.php/2013/11/27/small-businesses-the-backbone-of-the-american-economy/#sthash.vDny3RQE.dpuf