Tomorrow — July 24th — the Federal Minimum Wage will increase to $7.25 an hour from $6.55, a more than a 10 percent increase.
If you believe such a raise will cause job losses, there are statistics to support that point of view. There are also statistics supporting the other side. So, who’s right?
For those ready to jump on the Obama administration for this increase and it’s poor timing in conjunction with the recession and recovery, don’t forget this increase (and it’s selected effective date) was passed in 2007, and this is the third increase in three years.
Is the timing of this increase unfortunate? Maybe. Conservative economists think so, while many more liberal economists think it will potentially increase spending.
The impact will depend on a number of factors, including the minimum wage in your state, the local economy, the unemployment rate where you live, the kind of job or a combination of any of these and even other factors. If you’re in a state where the minimum wage is higher than the federal minimum wage (which is true in more than half the states), the impact will probably be less as employers have already adjusted their hiring practices with consideration given for the state minimum wage. Locales where there is high unemployment may feel a greater impact if job losses come as a result of wage hikes, and the same impact would occur anywhere wage rates come in to play as a criteria for job elimination. Some employers will also reduce hours and benefits for workers at the new minimum wage to lessen the total financial impact on their bottom line. Overall, economists who study these changes are saying the largest groups that will be affected by the increase in the minimum wage are those ages 16-24 and those in low-skilled jobs.
A positive impact for those in low-skilled jobs who keep their jobs is that they will take home about $1,450 more per year. To the millions of people impacted by the increase, this may mean several months of rent, car payments, groceries or utility bills, or the ability to pay down debt or money to put in savings they wouldn’t have otherwise had. Seventy cents an hour may not be a lot in some eyes, but its a 10.7 percent raise and is roughly five times the size of the average increase (2.2 percent) in 2009.
Additionally, an upward push for jobs paying slightly above minimum wage (e.g., $9/hour), usually occurs. Pay scales are quite often adjusted to keep these jobs at a similar difference in pay from those at minimum wage. If this adjustment doesn’t happen, those employees may be demotivated or demoralized by being paid at or close to minimum wage again.
While I’d like to believe in what the more liberal economist say, for those included in the two largest groups, the likelihood of fewer job opportunities is real. There are companies who will forego filling an opening they may have had, or eliminate (more) positions, because they cannot afford the additional financial burden, which includes wages and other payroll-related expenses such as Worker’s Compensation & FICA. As a former small business owner in the food service area, I paid more than minimum, but increases impacted me because of my philosophy of staying ahead. I can tell you that such increases impacted my ability to increase the size of my staff or replace open positions.
Hang on — it’s going to be an interesting ride.
Terri Albee, CCP, is managing partner of HR Ops Team LLC, which provides scalable and affordable human resources services, ensuring human resources structures are in legal compliance, streamlined for funding or exit events, or just optimized for day-to-day operations. Terri has planned and managed HR operations in a variety of industry verticals from start-up organizations to the Fortune 500, domestically and globally. Her experience encompasses design, implementation, compliance and management of compensation, benefit and equity plans at all levels.
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