Buffalo News: Opinions split on how hike in wage affects the economy

Some firms cut staff to cover payroll costs

By Diane Stafford and Tony Pugh
McClatchy Newspapers, July 26, 2009

The federal minimum wage rose from $6.55 to $7.25 an hour on Friday, bringing with it controversy about whether the increase is good or bad for the economy.

The raise, which affects about 4 million workers nationally, is the third and final increase mandated by Congress in 2007.

For a full-time minimum wage earner, the bump up means $28 a week more.

“When you have low income, any kind of increase in your paycheck is a big help,” said Sharon Davis, a minimum-wage earner who has a clerical job for 4z hours a day.

Her small increase “makes you feel that much better about paying your bills,” said Davis, a senior citizen who entered the work force to augment her husband’s disability income.

But for small-business owners struggling to make a profit, the mandated increase may present problems.

The National Small Business Association reported this week that the number of small businesses hiring new employees in the past 12 months dropped from 18 percent in December to 9 percent in July, and about two-thirds reported decreases in sales and profits.

Each minimum wage increase “is killing me,” said Kansas City restaurant owner Manny Lopez, who said that each increase causes him to cut staff because he can’t raise prices enough to cover the higher payroll costs.

“I have 80 on payroll,” Lopez said. “Last increase, I had to cut 12 to 15 part-time people. This time I will have to shave it again. As an independent restaurateur, I can’t survive without staff cuts.”

The U. S. Department of Labor says the change will mean a raise for minimum-wage workers covered by the Fair Labor Standards Act in 30 states where state minimums are lower than the federal rate.

In New York, the minimum wage rose 10 cents an hour with the federal increase. The state’s previous mimimum was $7.15.

Generally, the federal law covers workers at enterprises with sales of at least $500,000 a year and those that engage in interstate commerce, which includes accepting national credit cards, so most workers will be covered by the federal increase.

Advocates for the increase note that in real terms (adjusted for inflation), $7.25 an hour has about 25 percent less buying power than the $1.60 minimum wage had in the late 1960s. The Economic Policy Institute, a worker-oriented research group, says the minimum wage has failed to “keep pace with workers’ capacity to produce goods and services.”

Opponents say each minimum wage increase causes more entry-level workers to lose jobs because employers, like Lopez, cut staff to accommodate raises for employees who remain.

Just as various think tanks disagree about minimum wage mandates, some business owners also have different opinions. For example, about 1,000 business leaders this week released a “Business for a Fair Minimum Wage” statement.

“Higher wages benefit business by increasing consumer purchasing power, reducing costly employee turnover, raising productivity, and improving product quality, consumer satisfaction and company reputation,” the document said.

Signers included Costco, the U. S. Women’s Chamber of Commerce, and small-business owners from all 50 states.

A study by economists at the Federal Reserve Bank of Chicago estimated that the minimum wage increases in July 2007 and July 2008 have generated $4.9 billion in spending and that this year’s increase would put another $5.5 billion into the economy.

Coming at worst time

But other business owners and some economists say the required increase is coming at the worst possible time. In mandating the three-step increase three years ago, Congress did not foresee the current recession.

A report released Thursday by the Families and Work Institute said the recession has caused revenues to fall for two-thirds of employers, and 90 percent of those with lower revenues have cut their labor costs.

Those against the minimum wage hike say that higher rate will cause employers to raise the quality bar for employees, thus shutting out the least-skilled, the very workers the law was designed to help.

But U. S. Labor Secretary Hilda Solis issued a minimum wage statement that, in part, said, “Contrary to popular belief, minimum wage earners are not just teenagers working summers bagging groceries or selling jeans at the mall. Many minimum wage earners are in fact involuntary part-time workers because their hours have been cut during this recession.”

There’s a third point of view that says debating the mini-mum wage is a tempest in a teapot. Only a small percentage of U. S. workers earn minimum wage because market forces have pushed most wages higher. Indeed, it’s difficult in many cities to find minimum wage earners, even among the proverbial burger flippers.

Regardless of the wage hike’s effect, there is precedent for raising the minimum wage in a down economy. The federal rate (then 25 cents an hour) was established in 1938 as a key to economic recovery from the Great Depression.

And the new minimum wage is not helping all low-wage workers. Roughly 146,000 Americans—many of them restaurant, hotel, car wash and nail salon employees—who are paid mainly through customer tips earn a lower federal minimum wage, $2.13 an hour.

That federal floor wage for tipped workers has been stuck at $2.13 hourly for 18 years in many states.

Folks at the National Employment Law Project, a pro-labor advocacy group in New York have just released a report, “Restoring the Minimum Wage for America’s Tipped Workers,” that calls for increasing the $2.13 rate and improving protections against “tip stealing” by employers and managers.

Congress established the tipped-worker minimum wage in 1966 as a fixed percentage of the full minimum wage, but it dropped the provision that linked the two rates in 1996.

Thirty-two states and the District of Columbia already have raised their minimum wages for tipped workers above the federal rate, and in 2010, 22 of these states will pay tipped workers at least 60 percent of the full minimum wage.

Tipped worker wages

However, the 18 other states, which include New Jersey, still pay tipped workers the $2.13 hourly rate. New York has a range of wages, all under review, for tipped workers, including $4.60 for food service workers.

Even with their frozen base wage, most tipped workers still earn several dollars more than the standard minimum wage when their tips are included. Further, if tips alone don’t bring their earnings to the standard minimum-wage level, employers, by law, must make up the difference.

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