Minimum-Wage Hike May Cost More Than It's Worth - TheStreet

Minimum-Wage Hike May Cost More Than It's Worth

To absorb the higher wages, costs may be passed on to consumers, or entry-level workers may lose their jobs.
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The recent minimum wage increase probably sounds great to the 13 million workers (10% of the workforce) affected, but the reality might not be as rosy for many of them. For some, it could even lead to job losses and reduced work hours.

The second of a series of three minimum wage increases totaling $2.10 took effect on July 24 as part of Congress' Fair Minimum Wage Act of 2007. In 2007, the federal wage minimum was increased to $5.85, this year to $6.55; and in July 2009, it will be raised to $7.25.

But to some business pundits, a salary raise mandated by the federal government, intended to help bring workers' income above the poverty line, will backfire. Thousands of young workers or mentally handicapped persons who depend on the unskilled, low wage, entry-level work, will lose their jobs, many believe.

"It's never good to have government set the salaries for a company," warns William C. Dunkelberg, chief economist for the National Federation of Independent Business.

He explains: "You are raising wages, but you don't get more output, the employee doesn't work any harder and it doesn't add value," said Dunkelberg, adding that for the small business owner who has 20 employees, he or she will likely be required to adjust the pay structure upward for every employee. "The cost adds up, and it will either be passed on to the consumer, to the business itself, or result in letting go of the same minimum wage employee it was meant to help."

It is a scenario that doesn't improve the economy, in Dunkelberg's view: "You have destroyed young, unskilled people from getting a job forever."

He also says that while the minimum wage increase would impact the fast-food conglomerates such as

McDonalds

(MCD) - Get Report

or

Burger King

(BKC)

, the pain is greater for the small mom-and-pop businesses that, in the aggregate, hire many more people in a small town than the fast food places do.

On the Other Hand...

Mark Weisbrot, co-director of the Center for Economic and Policy Research, disagrees, saying the wage increase does not affect unemployment.

"Unemployment is a macro economic phenomenon, not a micro phenomenon, so employment is determined by the level of demand at the economy-wide level, and not by the level of wages in any particular industry. Obviously, if you raised it enough, you could get some impact on unemployment -- but it's so small."

"Most places around the country, you can't even hire people at that wage," Weisbrot says. "Wages have not kept up with productivity within the last 30 years, so what you're looking at is catch-up."

The wage increase this year is hitting 26 states around the country that must adjust their state's minimum wage to equal the federal one -- if it is higher than the state's.

Many states have minimum wages already set higher than the federal standards. The three highest are California and Maryland-- both at $8.00 an hour -- and Washington, where it is $8.07.

Biting the Bullet

One of the largest employers of workers in the country, restaurants are feeling the heat. According to the National Restaurant Association, one in 10 workers in the country are employed by restaurants.

NRA spokesperson, Maureen Ryan, says that with "the weak economy and highest food and energy price inflation in decades, the mandated wage hikes are an additional burden on restaurateurs."

She says the NRA did a survey last month talking to 1,300 restaurateurs in 18 states about actions they may have taken as a result of the 2007 increase.

"What we found is that they had to make some hard choices, 58% of restaurant operations increased menu prices; 41% reduced hours their employees work; 23% took no action and absorbed the cost from their bottom line."

"The wage increase couldn't come at a worse time," says Laura Goins, director of communications of Kentucky Retail Federation, which represents 6,000 retail businesses throughout Kentucky, one of the states adjusting to wage increase.

"We've heard nothing about our members letting employees go. The majority of our members are managing to absorb the cost of doing business. The danger, however, is that eventually the costs may have to be passed on to the consumers.

"Everyone's praying for the downturn of the economy to end," she says.

Genia Gould is a freelance journalist based in New York City and the publisher of a community newspaper, WG News + Arts, in Williamsburg, Brooklyn.