Minimum Wage Is Set to Rise

Minimum-wage workers will see a bump in their pay come July 24, when the federal minimum rises by 11%, to $7.25 an hour from $6.55. It will put an extra $120 per month in the pockets of the more than 2 million janitors, cafeteria workers, and child-care providers, among others, who rely on incomes of less than $15,000 annually.

"This well-deserved increase will help workers better provide for their families in the face of today's economic challenges," Secretary of Labor Hilda Solis said in a July 16 news release. "I am especially pleased that the change will benefit working women, who make up two-thirds of minimum-wage earners."

The raise is the third and final increase as mandated by the Fair Minimum Wage Act of 2007. An amendment to the Fair Labor Standards Act first hiked the federal minimum wage to $5.85 per hour from $5.15 in July 2007, and the following July it climbed to $6.55. Adjusted for inflation, the $7.25-per-hour wage is 25% less than it was in the late 1960s.

"Adding Insult to Injury" Not everyone is lauding the increase—especially at a time when the U.S. economy suffers from a recession and the unemployment rate has climbed to 9.5%. The National Small Business Assn. (NSBA) warns the wage hike may produce adverse effects. "It's obviously a concern for a lot of small businesses, particularly given the bad economy," says Molly Brogan, vice-president of public affairs at the Washington-based advocacy organization. "I think the minimum-wage increase coming on is adding insult to injury," she says, calling the timing of the change "unfortunate."

In its 2009 Mid-Year Economic Report to be released on July 22, NSBA finds that just 9% of small businesses hired new employees in the past 12 months, down from 18% in December. Over the same period, 62% saw revenues decrease while 66% experienced a decrease in profits, according to the report.

Higher wages, however, are necessary for the millions of Americans who are increasingly feeling the pinch of recession, contends Eileen Appelbaum, a visiting scholar at the Center for Economic & Policy Research and an economist at Rutgers. "The most important thing in getting the economy moving again is to restore consumer confidence," she says. "Research shows that people with higher income will save but the people who are already strapped for cash and barely making it—people who are resource-constrained and income-constrained—will go out and spend the extra money coming in."

State Laws Vary Instead of hurting small businesses, Appelbaum considers the wage increase an advantage to them, helping to boost consumer spending without increasing state and federal deficits. "It's really important to have a minimum wage that provides a floor to support a growing middle class," she says. "There is no better time to provide the working poor with extra money in their pockets."

A dozen states require employers to pay workers more than the federally mandated minimum, inclduing Washington, Oregon, and Vermont. Thirty states currently have a minimum wage that is at or below the federal minimum or have no state minimum at all, including New York, Texas, and Virginia. When state and federal minimums differ, employers must pay the higher wage. Several states have tied their minimum-wage increases to consumer prices as an automatic setting mechanism, while the District of Columbia requires its minimum to be $1 above the federal wage.

A 2008 NSBA survey of small and midsize businesses nationwide found that only 17% of small businesses employing fewer than 500 employees pay less than $10 per hour on average. A minimum-wage increase, therefore, will not directly affect all small businesses but could cause a ripple effect of higher wages as those earning just above the minimum expect their incomes to rise, commensurate with minimum-wage workers.

Before it's here, it's on the Bloomberg Terminal.