In 1938, the U.S. Congress passed the Fair Labor Standards Act, which established that workers are entitled to a base hourly wage. However, the minimum they receive and how much money they earn has remained a debate across the political aisle for nearly a century.
A common question is: how can one survive on $7.25 per hour, the current federal minimum wage? Skeptics say it’s not a living wage, citing that it has remained at the same number since 2009, despite inflation. Some argue that the wage should be raised to at least $15 an hour.
But raising the minimum wage often provokes controversy, with varied economic impacts. Most of the research on the impact of a minimum wage increase has focused on for-profit companies—but what impact would it have on nonprofits?
A team of Fox School researchers—Steven Balsam, professor of accounting; Connie X. Mao, professor of finance; Min Xu, MRes ’22, and Yinge (Jack) Zhang, PhD ’22—try to answer that question in their paper “The Effect of State Minimum Wage Increases on Nonprofit Organizations,” which is forthcoming in Nonprofit and Voluntary Sector Quarterly (NVSQ).
“There has been a lot of research around how a minimum wage increase affects the economy and for-profit companies,” says Balsam. “We took a different approach to our research because nonprofit organizations have not received as much attention.”
The team looked at the economic impacts on non-profits from 15 different states that increased their state minimum wage a total of 21 times between 2013 and 2015.
The research found, based on from the reports in the organizations’ IRS filings, that employee growth slowed in states that had a minimum wage increase relative to states that did not.
“Increasing the minimum wage is an external event where businesses do not get to partake in the decision; politicians do,” says Balsam. “It is the nonprofit’s choice on how they will deal with this because they have no shareholders who can absorb a percentage of their costs. So, they must respond by cutting services, number of employees or the hours employees' work. Another response is to increase their revenue through things like fundraising.”
Across the political aisle, this topic often generates many questions and potential impacts—whether people will lose their jobs, find higher paying places to work or if organizations will be able to sustain operations while having to pay their employees more money.
“Effectively, the Democrats will argue that an increase in minimum wage will help raise people out of poverty and it has no effect or a minimal effect on employment,” says Balsam. “Republicans will say that this has a detrimental effect on employment and the economy.”
Nonprofit organizations are different from for-profit businesses because they don’t have stakeholders and often don’t have customers.
For example, grocery stores have customers, and if the economy is facing inflation, they can increase their prices of items to match the costs. Nonprofits often don’t have that ability because most of the time, they don’t have customers.
“If costs increase and nonprofits have a fixed budget from grants, they ultimately have to spend less money,” says Balsam. “If labor costs rise as well, but there is already a fixed budget for labor costs put in place, then these organizations must cut employee hours, the number of people working or even both.”
Balsam explains how they found that a higher rate of nonprofits went out of business in states that have a minimum wage increase relative to states that did not. They also concluded that increasing the minimum wage will substantially decrease employment growth for nonprofit organizations versus for profit businesses.
“When the nonprofits decreased their employee numbers post minimum wage increase, we discovered that there was an increase in the use of automation, meaning information technology tools,” says Balsam. “Using automation tools requires less workers, less time and it is a very common economic concept used to keep labor costs low.”
Installment of these tools could initially cost the organization a great amount of money, but they will save more in the long run and need less people working fewer hours.
“There is little risk for the business, but more directly for the employee who instead of getting an increase in their wages, is actually losing their job,” says Balsam. “This is one of the arguments that Republican-leaning economists would argue because they suggest that certain jobs will be either outsourced or replaced by technology.”
Though technology can’t replace all jobs, it is definitely influencing the way that non-profits operate.
“A minimum wage increase will cause some jobs to be replaced by technology and others in the long-term,” says Balsam. “There is no denying that the use of AI and ChatGPT software in the workplace will happen regardless of the minimum wage increase or not. It just may happen faster if wages go up.”