Is the Minimum Wage Hike a Good Idea?

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On July 24, the minimum wage will increase from $6.55 to $7.25 an hour. Every worker deserves a living wage, but the timing of the pay hike is less than ideal. The national jobless rate is nearly 10 percent, and among American teenagers—who are likely to work many of those minimum-wage jobs seeing a pay increase—the unemployment rate is nearly 25 percent. A mandatory wage increase should help people who are currently making minimum wage, so long as they get to keep their jobs, of course. But the increase will certainly make it more difficult for businesses to hire more people, and it may even prompt businesses to scale back further and eliminate positions.

Some thoughts from Smart Money:

A mandated raise won’t do job seekers any favors especially if they’re looking for temporary or entry-level positions… 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 …

Those who manage to snag 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,” says Chip Hunter, an associate professor of management and human resources at the Wisconsin School of Business.

Also, there might be a silver lining for part-time workers. Firms looking to cut costs may promote their part-timers to full time instead of hiring new minimum-wage workers.

And from the WSJ editorial page:

Here’s some economic logic to ponder. The unemployment rate in June for American teenagers was 24%, for black teens it was 38%, and even White House economists are predicting more job losses. So how about raising the cost of that teenage labor?

Sorry to say, but that’s precisely what will happen on July 24, when the minimum wage will increase to $7.25 an hour from $6.55. The national wage floor will have increased 41% since the three-step hike was approved by the Democratic Congress in May 2007. Then the economy was humming, with an overall jobless rate of 4.5% and many entry-level jobs paying more than the minimum.

That’s a hard case to make now, with a 9.5% national jobless rate and thousands of employers facing razor-thin profit margins.

There’s been a long and spirited debate among economists about who gets hurt and who benefits when the minimum wage rises. But in a 2006 National Bureau of Economic Research paper, economists David Neumark of the University of California, Irvine, and William Wascher of the Federal Reserve Bank reviewed the voluminous literature over the past 30 years and came to two almost universally acknowledged conclusions.

First, “a sizable majority of the studies give a relatively consistent (though not always statistically significant) indication of negative employment effects.” Second, “studies that focus on the least-skilled groups [i.e., teens, and welfare moms] provide relatively overwhelming evidence of stronger disemployment effects.”

Proponents argue that millions of workers will benefit from the bigger paychecks. But about two of every three full-time minimum-wage workers get a pay raise anyway within a year on the job. Meanwhile, those who lose their jobs or who never get a job in the first place get a minimum wage of $0.

Mr. Neumark calculates that the 70-cent per-hour minimum wage hike this month would kill “about 300,000 jobs for those between the ages of 16-24.” Single working mothers would also be among those most hurt.

Keep in mind the Earned Income Tax Credit already exists to help low-wage workers and has been greatly expanded in recent years. The EITC also spreads the cost of the wage supplement to all Americans, not merely to employers, so it doesn’t raise the cost of hiring low-wage workers.

For example, consider a single mom with two kids who earns the current $6.55 minimum at a full-time, year-round job. In 2009 she receives a $5,028 EITC cash payment from Uncle Sam — or about an extra $2.50 per hour worked. Other federal income supplements, such as the refundable child tax credit, add another $1,900 or so. Thus at a wage of $6.55 an hour, her actual pay becomes $10.02 an hour — more than a 50% increase from the current minimum. (See nearby table.)

But that single mom can’t collect those checks if she doesn’t have a job, and the tragedy of a higher minimum wage is that it will prevent thousands of working moms striving to pull their families out of poverty from being hired in the first place.

If Congress were wise and compassionate, it would at least suspend the wage hike for one or two years until the job market recovers. We know this Congress won’t do that, but someone has to speak up for the poorest, least skilled Americans.