St. Louis Post Dispatch: Minimum-wage increase is coming at the worst possible time

By David Nicklaus
St. Louis Post Disptach, July 24, 2009

About 4.5 million American workers will see fatter paychecks starting today, but their good fortune is bad news for the rest of the economy.

With unemployment at 9.5 percent nationally, this is the worst possible time to be raising the minimum wage. A higher minimum wage may force struggling businesses to lay off workers or cut back their hours. It certainly makes them less likely to hire young, unskilled workers, who have been hit hard by this recession.

Yet Congress, during better times, decreed that the federal minimum wage would rise to $7.25 an hour, from $6.55, starting today. In Missouri, where the state minimum has been $7.05 since January, workers will get only a 20-cent raise.

Illinois, with a state minimum of $8 an hour, is not affected.

Congress' intent was to keep pace with inflation, but we've been suffering deflation, or falling prices, this year. The real cost of hiring entry-level workers was already rising, even before today's increase.

"This is a pretty bad time to be doing this, especially for small businesses and retailers and the like, where minimum wage jobs tend to be and where hiring starts soonest coming out of a recession," says Howard Wall, an economist at the Federal Reserve Bank of St. Louis.

Minimum wage proponents tout the increase as an anti-poverty measure, but a higher minimum prices many unskilled workers out of the job market. The teenage unemployment rate is already 24 percent, and among African-American teens it's 38 percent.

Forrest Miller, owner of Giuseppe's restaurant in St. Louis and Royale Orleans banquet hall in south St. Louis County, says he can't afford to hire inexperienced staff at today's minimum wage; payroll taxes and unemployment insurance, he says, push the total cost above $9 an hour.

"We helped students a lot, when wages weren't so high, by letting young people learn to work," Miller said. "Now when we have an opening, we might find an older person or somebody who has more experience working."

Miller said he's cut his staffing by half since the beginning of 2007, when Missouri's minimum wage went up under a referendum passed the previous year.

"When you don't have any more money in the checking account at the end of the week, and somebody says you have to pay more for something, you have to cut somewhere," Miller said.

Unfortunately, many people can't grasp such simple business math. A group calling itself Business for Shared Prosperity asserts that the minimum wage increase will stimulate the economy. They're ignoring the fact that any money going into the pocket of a minimum wage worker will be coming out of the pocket of a struggling business owner.

The Economic Policy Institute, a left-leaning think tank in Washington, says the increase is justified because today's minimum wage workers are more educated and more productive than those of 30 years ago. Those same figures, though, can be used to make the opposite point.

"It's what you would expect," Wall says. "The higher the minimum wage is, the fewer less-skilled people will be employed. People have not become any more productive; you've just eliminated the least productive workers, who are also the most needy."

It may seem coldhearted to argue against higher pay for low-wage workers. What the unskilled need most, however, are job opportunities. Any policy that takes away those opportunities, especially in the middle of a severe recession, is wrongheaded.