Marketplace Radio: Hike for min. wage despite recession



KAI RYSSDAL: The federal minimum wage went up today. It was a 70 cent bump to $7.25 an hour. Workers at the bottom end of the pay scale in 31 states will be getting raises. The other 19 states already had minimums higher than the new federal standard. The increase had been in the works for a while. It's the last of a three-step adjustment that was started years ago. It just happens to be coming in the middle of the worst recession in 75 years.

Marketplace's Jeff Tyler reports.

Jeff Tyler: Is this the best time or the worst time to raise the minimum wage? It depends on who you ask.

Heidi Shierholz is an economist at the Economic Policy Institute in Washington.

Heidi Shierholz: What this will do is get additional wages to low-income families, who will spend it in the economy and stimulate the economy. So this is actually perfect timing for this thing.

She says the wage hike could act as a stimulus package that doesn't require government spending.

Shierholz: We estimate that this increase, though modest, will actually give the economy a $5.5 billion boost.

Business groups are skeptical. Marc Freedman is with the U.S. Chamber of Commerce.

Marc Freedman: I don't think you could find a worse time to do this. Businesses are struggling to stay afloat. And the idea of adding a wage burden to them at this moment could potentially be crushing.

Consider the effects on the owner of a local pizza parlor. That's the example used by Bill Dunkelberg, chief economist at the National Federation of Independent Business. A 70 cent increase in hourly pay for 10 minimum wage employees will cost an extra $14,000 a year.

Bill Dunkelberg: Now that is either going to come out of the profits earned by the owner, which typically isn't real high in the pizza joints. Or it's going to be passed on to customers in the form of higher prices. When pizza prices go up, people buy less and so somebody is going to lose a job.

More layoffs when unemployment is already close to 10 percent could slow a recovery. But studies suggest job losses will be small. Last year, the Journal of Labor Research found that a 10 percent increase in the minimum wage caused small businesses to reduce employment by around 1 percent. This time around, there may be even less damage.

Employers have had three years to plan for this hike. Even workers who already earn more than the minimum wage could see a bump. For example, teachers' aids at one pre-school in Boise, Idaho currently make $8 an hour. To keep their wages on step above minimum, owner Scott McGavin plans to pay them more.

Scott McGavin: We want to make sure our people are paid competitively.

His business is struggling. So it won't be easy.

McGavin: It might be a little bit of a challenge for us, but it's a small challenge relative to somebody who's making $8 an hour.

Finally, it's worth remembering that the first minimum wage took effect during even worse economic conditions: In 1938, during the Great Depression.

I'm Jeff Tyler for Marketplace.

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