Minimum Wage Increase: Winners and Losers

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On Friday, July 24, the federal minimum wage increased for the third year in a row and millions of American workers are about to get a federally-mandated raise. However, the recession has left many wondering if and how the economy will benefit? Will it help workers at the bottom of the ladder, or will it kill their jobs?

The raise represents the final wage increase in a three-step boost to the federal minimum wage increase passed by Congress two years ago. The minimum wage will rise 70 cents or about 11%, to $7.25 per hour from $6.55. (Last summer, it went up 70 cents from $5.85.)

This increase will impact 31 states whose minimum wage levels are below $7.25, including Florida, Pennsylvania, Nebraska and New York. Employers in these states will have to match the federal minimum. The increase has no bearing on 20 states (including Washington, D.C.), which already mandate an hourly wage of $7.25 or more. The increase will give about 4.5 million workers a raise and boost hourly wages by $1.6 billion a year.

Wage increases are always controversial in a free market society putting employees against employers and this increase comes at particularly poignant moment for both sides. There’s low inflation, high unemployment and this is when teens and students are looking for summer jobs. Employers are strapped and facing new benefits requirements, while workers are struggling to pay their bills.

For many workers the increase is a benefit. It gets additional money to low-wage workers. It might mean being able to afford a visit to the doctor or college textbooks for the fall semester. But given the 26-year high unemployment rate and the fact that so many companies are hamstrung by the gloomy economic climate, some might see a mandatory wage increase as a setback in terms of hiring and providing much needed jobs. Here are some winners and losers of the wage increase:

Job seekers stand to lose

Some analysts argue that increasing the minimum wage would create additional financial hardships for employers who are currently having very small profit margins. As the result, additional jobs will be lost.

A mandated raise won’t benefit the job seekers especially if they’re looking for temporary or entry-level positions. Studies suggest that increasing the minimum wage has a slightly negative effect on the job market. According to a study published in July 2008 in the Journal of Labor Research, a 10% increase in the minimum wage is associated with a 0.9% to 1.1% decline in retail employment and a 0.8% to 1.2% reduction in small-business employment. Minimum wage increases typically target low-wage, low-skilled workers as well as teens and young adults. The industries that rely most on minimum-wage workers include fast food restaurants, small-scale independent retail stores, day care establishments and hotels.

The prospects for a teen looking for work are grim, and the wage hike may exacerbate their problems. The major providers of summer youth employment — movie theaters, restaurants and mall stores — are increasingly turning to older workers or scaling back their hiring amid cutbacks. With a higher minimum wage, already-cautious companies will decide they can do without some of their low-wage, low-skilled positions. They’ll use less low-wage labor, cut their hours or drawn on more skilled workers if they can.

Low-skilled and younger workers stand to gain — if they’re working

Those who manage to get a minimum wage job or hold on to their existing one stand to gain. There’s an economic argument to be made that when you push things up at the bottom during a recession, you’re pushing more money into the pockets of people who are surely going to spend it and not going to save it. Also, there might be a silver lining for part-time workers. Companies looking to cut costs may promote their part-timers to full time instead of hiring new minimum-wage workers, which would be more expensive.

Some consumers could see higher prices

Most companies knew a wage increase was in the offing and planned accordingly. However, for those businesses that rely heavily on low-wage workers, higher costs could trigger higher prices. If costs go up, you have to pass some of that to your customers. Where consumers might see higher prices and by how much is difficult to predict.

For example, a 2005 study showed that restaurant prices rose in response to an increase in the minimum wage. However, some analysts argued that even though fast food restaurants will feel the brunt of these wage hikes in terms of labor costs, they are unlikely to respond by bumping the prices for a cheeseburger and fries. It’s a different situation now. Consumers are cash-strapped as it is and restaurants might have to absorb wage increase.

Anna Timone (195 Posts)


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