More important, millions of small businesses with annual revenue below $500,000 are exempt from federal minimum wage unless they engage in interstate commerce. In June 2020 there were 13.5 million U.S. businesses with sales of less than $500,000, accounting for 75.5% of all U.S. businesses according to the NAICS. Many little companies that sell goods rather than services do engage in interstate commerce, marketing products on the Internet or mailing them out of state, so they are subject to the federal minimum wage. Yet the U.S. is mainly a service economy and services include many micro independents, such as mobile geeks for home tech, local housekeeping services or therapists to fix your backache. Millions of independent local restaurants, accountants, dry cleaners, barbers, mechanics and more do not engage in interstate commerce so they are not required to pay the federal minimum wage.
The federal minimum wage may also be avoided (de facto if not de jure) by paying cash in the informal gig economy, or by subcontracting unskilled tasks such as janitorial services to exempt micro‐business contractors. Millions of tiny businesses and contractors are far too numerous and unprofitable to be tracked and policed by federal agents, partly because people rarely file complaints about voluntary agreements between consenting adults.
All these jobs that are exempt from the FLSA have always provided a safety valve allowing displaced workers to find a non‐FLSA job whenever a higher federal minimum wage caused big companies to shrink hours and payrolls. Job losses happen because (1) higher labor costs gradually force more and more marginally unprofitable branches or businesses to close, and because (2) higher labor costs encourage investment in labor‐saving machinery such as self‐checkout facilities at Wal‐Mart, Home Depot, or ordering fast food on a cellphone app rather than in person.
When an increased federal minimum wage shrinks job offers among such larger interstate companies, that does not leave the resulting displaced workers no choice but to remain jobless. They can instead queue up with the very large number of other unskilled people who always compete for the many “below the minimum” jobs that are either legally exempt from the federal minimum wage, or effectively off‐the‐books. The trouble is, such increased competition for exempt jobs after the minimum wage goes up drives wages down for those who were already working below the previous lower minimum. It makes the poorest poorer.
An additional million or more workers earning less than the federal minimum every time that minimum wage was increased did not just mean nothing changed – that they simply kept their old jobs and wages even though their previously legal wage was no longer legal. That can’t possibly explain it, because Federal law does not exempt low‐wage workers in big multi‐state chains like Hilton or McDonald’s. Their workers could not possibly have kept working at a wage below the increased minimum. And the evidence of rising “below minimum” jobs shows that many did not keep their previously FLSA‐covered jobs.
The only logical explanation is that over a million workers in covered jobs did, in fact, lose such jobs each time the federal minimum wage went up. The reason that did not add a million or more to the number of unemployed is that they found jobs in occupations and businesses exempt from the federal minimum. Every increase in the federal minimum wage for the past 40 years has resulted in huge hordes of people suddenly added to the ranks of millions already competing for low‐wage jobs the federal minimum cannot reach. Big surges in subminimum‐wage jobs always happened whenever the federal minimum wage was increased, and never at any other time.
Past increases in the federal minimum wage always resulted in many more people pushed into jobs paying below minimum and usually losing whatever benefits they previously enjoyed. Far from being an effective and humane way to raise the lowest incomes the unintended consequence of increasing the federal minimum wage has, in fact, been to force hundreds of thousands more Americans into substandard jobs and make the poorest workers poorer.