With jump in minimum wage comes debate over its worth, timing

McClatchy NewspapersJuly 23, 2008 

WASHINGTON — More than 2 million low-wage workers will get a small raise on Thursday when the federal minimum wage jumps 12 percent, from $5.85 to $6.55 an hour.

And depending on whom you talk to, it's either the best of times or the worst of times for the nation's base wage to rise.

While most Americans have traditionally supported minimum wage increases, the new rate hike comes at a bad time for businesses, particularly small businesses, struggling through the economic downturn.

As energy costs increase, credit tightens and consumers hold on to their spare cash, business owners are loath to increase their labor costs.

"It becomes very hard to increase wages when small businesses are in very tight competition for their goods and services," said Marc Freedman, director of labor law policy at U.S. Chamber of Commerce, which opposes the wage increase.

Unlike larger businesses that can better absorb labor cost increases, Freedman said small businesses will struggle to find the extra money and can't always do so by simply by raising prices in a fiercely competitive marketplace.

Freedman said his biggest problem with the increase is that businesses get nothing for it. "It's an arbitrary increase not associated with any increased contribution to the enterprise," he said.

But Jared Bernstein, senior economist at the Economic Policy Institute, said business owners have benefited from years of increased employee productivity and stagnant wage growth without sharing the wealth with workers.

"I can absolutely sympathize that this has got to be a tough time for them to face higher labor costs, but from their perspective, there's never a good time to raise the minimum wage," Bernstein said. "When Congress passes these bills, they can't know what economic conditions businesses will face when the phase-in occurs."

Bruce Cooper, a full-time minimum wage earner in Kansas City, Mo., busses tables for a living. He said he handles many responsibilities outside his job description and makes far less than his chef's training and skill level merit.

He'll earn an extra $28 a week at the new wage level. But that money will be quickly eaten up by transportation costs for his 52-mile round-trip ride to work each day. Even with the raise, he wonders if the cost of his commute is sustainable.

"I'm going to have to decide whether or not to drop a job I love doing or stick with it and bear through it," Cooper said.

Thursday's increase is the second of three scheduled rate hikes that will ultimately push the minimum wage to $7.25 per hour on July 24, 2009. The three increases come after the wage was stuck at $5.15 an hour for nearly 10 years before rising to $5.85 in July 2007.

More than 20 states have already enacted higher minimum wage levels than the new federal rate.

Over the years, inflation has eroded the buying power of the minimum wage. A full-time worker who earned the $2.90-an-hour minimum wage in 1979 earned enough to pull a family of three out of poverty.

That same family would fall nearly $4,000 below the poverty threshold today because the minimum wage hasn't kept pace with inflation.

In fact, to equal the buying power of the 1979 minimum wage, the new rate would have to be $8.74 an hour, according to government calculations.

David Neumark, an economics professor at the University of California, Irvine, said low-income families are generally hurt by the minimum wage because it causes employers to cut positions and hire fewer people.

"The minimum wage increase gives a fairly large number of people a very small raise, but a smaller number of people may lose their jobs and that's a much bigger hit," Neumark said.

But because relatively few workers earn the minimum wage and because most states have higher wage levels, Bernstein said he doesn't expect layoffs, job cuts or hiring freezes to increase any more than they would naturally in an economic downturn.

Researchers at the University of California, Berkeley's Institute for Research on Labor and Employment (IRLE) just released two new reports on the impact of minimum wage increases. The reports found the wage hikes fatten pockets for low-wage workers and do not hurt their employment prospects.

The University of California studies: http://www.iir.berkeley.edu/research/minimumwage.html

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