Minimum Wage Increase Draws Mixed Reviews

For the first time in 10 years, the United States has a new minimum wage, one that’s drawing mixed reviews from economists and experts. What is the minimum wage increase going to positively affect? Will the increase in minimum wage have negative effects?

The minimum wage increase is part of an Iraq spending bill that was in late May cleared by Congress and signed into law by President Bush. It will raise the minimum wage in three increments, from $5.15 an hour to $7.25 an hour by 2009-an increase of about 41 percent.

The measure also provides $4.84 billion in small-business tax breaks.

Liana Fox, an economic analyst at the Economic Policy Institute, a Washington-based research group, said, “$5.15 is completely inadequate. It’s even morally wrong that someone working full time in the U.S. is only earning $10,700 a year. I think $7.25 is a step in the right direction, but we’re still talking about a fairly modest increase.”

According to the U.S. Department of Labor’s Bureau of Labor Statistics, 1.7 million hourly paid American workers earned wages at or below the current minimum wage in 2006 ($5.15 an hour). Almost 75 percent of workers earning $5.15 an hour or less worked in service occupations, mostly food preparation and service jobs, BLS numbers show.

The EPI says 12.5 million workers will be affected by the minimum wage increase to $7.25 an hour.

Dr. Jill Jenkins, chief economist at the Employment Policies Institute, a business-backed nonprofit group in Washington, offered a different view on the rate hike.

“They talk about it being 10 years since minimum wage earners had a raise, but that just isn’t the truth. It’s an entry-level first step on the job ladder, and most people pull themselves out,” Jenkins said.

She said because of the minimum wage increase, employers will be less likely to have jobs for those on the lowest rungs of the job ladder.

“It puts them out of work, prevents them from gaining skills and moving ahead,” Jenkins said.

Where States Stand on Minimum Wage

More than half of all states have minimum wage rates above $5.15 an hour, which Fox said is evidence the federal minimum wage is insufficient.

Tammy McCutchen, former administrator of the Wage and Hour Division at the Department of Labor, said, “States have been adopting minimum wages that are higher where appropriate-California, Illinois, New York, etc.”

McCutchen, a Washington-based partner at Littler Mendelson, a labor and employment law firm, said she holds a moderate view on the federal minimum wage increase.

“I find myself in the middle because I think the minimum wage is a very important protection to the most vulnerable portion of our society. But I do have concerns of adopting a minimum wage on a national basis,” she said. “It’s very hard, because the minimum wage rate that is reasonable for employees in Manhattan will be outrageously too high for somebody in rural Mississippi. We’re a big country and most of the differences in pay relate to the industry you work in and the area of the country you live in.”

A recent study from the New York-based Fiscal Policy Institute shows that states with minimum wages above $5.15 an hour have had faster job growth among small businesses and in retail trade than states offering the federal minimum.

But the U.S. Chamber of Commerce says a minimum wage increase hits small businesses the hardest because they’re “the least able to absorb such a dramatic increase in their labor costs.”

Dr. Roderick Harrison, director of the DataBank at The Joint Center for Political and Economic Studies, a black think tank, said if businesses see costs escalate, they’re likely to pass them on to consumers in the middle- or upper-income brackets. These groups, he said, would barely notice the increase, particularly compared to other costs, such as health care and higher education.

“There are winners and losers. It would be disingenuous to say some people won’t get hurt; for some small businesses it might be the straw that breaks the camel’s back,” Harrison said. “But if you compare the minimum wage increase to health-care increases, or the cost of gas-the cost of gas is more likely to drive them out of business if they’re that close to the margin than the minimum wage.”

McCutchen said the $4.84 billion in tax breaks should make it less likely small businesses will lay off workers or raise prices of goods and services.

Effects of the Increase in Minimum Wage

McCutchen said “it was certainly time” for the federal government to raise the minimum wage, and that it seems a reasonable increase.

“I don’t think this increase in minimum wage will have a large economic impact because it’s been 10 years since the last increase in minimum wage and most workers are already above it. I don’t think we’re going to see a parade of horribles,” she said.

Liana Fox of the Economic Policy Institute agreed.

“I don’t think we’ll feel it much at all,” she said, pointing to other factors as having a greater economic impact, including gas prices, inflation and productivity.

Jill Jenkins of the Employment Policies Institute said there will be an impact, but it won’t be fully realized for several years, and it won’t be easily discerned.

“It’s easy to trot out the person who makes more because of the  in minimum wage; it’s a lot harder to find the ones who lost their jobs,” she said. “But say someone lost their job a year-and-a-half after the increase. They may not know it was because of the increase-they think it’s because there weren’t enough hours for them.”