Kansas City Star: Minimum wage increase is a double-edged sword

By Diane Stafford
The Kansas City Star, Jul. 23, 2009

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

The raise, which will affect 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 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 part-time clerical job.

Her small increase “makes you feel that much better about paying your bills,” said Davis, a senior citizen who entered the Johnson County 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 Manny Lopez, owner of Manny’s Restaurante Mexicano. He said 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 Missouri, Kansas and 28 other states where state minimums are lower than the federal rate.

Missouri’s minimum wage rose to $7.05 an hour in January, so the federal raise amounts to just 20 cents an hour in Missouri. (The higher minimum takes precedence.)

Kansas lawmakers ordered that state’s minimum to rise to $7.25 in January 2010. Until then, it stands at the nation’s lowest, $2.65, for a few thousand workers not covered by federal labor law.

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 Kansas 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 such as Lopez cut staff to accommodate raises for employees who remain.

The Employment Policies Institute, an employer-oriented research group, says last summer’s mandated raise — from $5.85 to $6.55 an hour — contributed to a 5 percent drop in teen employment.

That group even asked the federal government to consider putting today’s effective date on hold.

Just as various think tanks disagree about minimum wage mandates, some business owners 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 every state.

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 an additional $5.5 billion into the economy.

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 increase say the higher rate will cause employers to raise the quality bar for employees, shutting out the least skilled — the very workers the law was designed to help.

But U.S. Labor Secretary Hilda Solis issued a 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.”

A third point of view says debating the minimum wage is a tempest in a teapot.

Only a small percentage of U.S. workers earn the 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 increase’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.

To reach Diane Stafford, call 816-234-4359 or send e-mail to stafford@kcstar.com.

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