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Tags: finance, personal finance, federal minimum wage increase
 Millions of minimum wage earners are getting a boost from the federal government as the new minimum wage increase takes effect—an increase of 70 cents. This increase is the final stage in a series of minimum wage hikes passed by Congress two years ago. Wages has increased from $5.85 to $6.55 last summer to the new current one of $7.25.
While this raise is aimed at giving workers such as retail shop workers more buying power, it, at the same time, is said to be threatening small business and their ability to continue during this period of economic turmoil. The federal minimum wage increase is sparking a debate as who this is really helping, if at all.
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One side of the debate argues that the increase in wages is good for the economy—that it will be injecting money into the economy. The Economic Policy Institute, a liberal think-tank based in Washington, has reported that the raise will boost spending by at least $4.9 billion—acting as an economic stimulus.
Some estimates go as high as $5.5 billion in extra money that can be spent into the economy. While the impact may be modest, there is still an impact. However, those that question the timing of the minimum wage hike are many since conventional economics tend to argue that raises typically hurt a business resulting in less hiring.
The National Small Business Association, a leading opponent of the minimum wage hike, says that its members could see a drop in their financial situation. Molly Brogan, the association spokeswoman, said that “small businesses already have faced employment cuts in the last 12 months -- [and] are projecting more cuts -- and the minimum wage increase will only exacerbate that." This in turn, she continues, would force them “to make the difficult choice of going under or laying people off." Suzanne Clain, professor and living wage expert at the Villanova School of Business in Pennsylvania, said that “increasing the minimum wage would create additional financial hardships for employers, driving the nationwide unemployment rate above its current 9.5%.” More stress would be put placed on the economy as additional jobs may be loss as a result of smaller profit margins.
And job seekers may find it harder to find employment. This is because according to the Journal of Labor Research (July 2008), a “10% increase in the minimum wage is associated with a 0.9% to 1.1% decline in retail employment and a 0.8% to 1.2% reduction in small-business employment.” More companies may simply cut back on hiring low-skilled laborers or those affected by this raise, and simply draw on their skilled laborers or cut back the hours of those low-skilled laborers that they do hire.
For businesses that use a lot of low-skilled laborers, the resulting higher costs of the extra pay may result in them passing the costs to consumers. And this, according to economists, can further exacerbate an already slumping economy, with no end in sight seen, especially in states with double digit unemployment.
And the stimulus effect may not be so much as many workers may simply opt to save the 70 cents for fear of a cut in hours or worst yet, lay-offs. As Sara Campbell, a cleaner, said “"You never know. You might lose your job. They might start laying off and if they lay off, I'll have something saved up." What the effects will be will be seen within the coming months, if not years.
Hopefully, its desired positive effects will out weight its potentially strong negative consequences. Only time and reality will tell.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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