With the final phase of a $2.10 raise to the federal minimum wage in effect as of July 24, 2009, opinions on the economic impact of the wage increase vary widely. Most economists and labor analysts agree, however, that the timing of the increase is not good.

“The increase to the minimum wage most likely won’t have a major impact on the labor market, but given the current state of the economy and job market, it does come at a very inopportune moment,” said Gary Burtless, a senior fellow for economic studies at the Brookings Institution in Washington, D.C.

Congress approved the increase to the federal minimum wage in May 2007—the first increase to the wage in 10 years. The legislation, which was signed into law by President George W. Bush, raised the wage from $5.15 to $7.25 per hour in three steps of 70 cents set over two years. The second phase of the increase took effect in July 2008.

“The two-year phase-in period does mean that employers have had time to plan for this change,” Burtless said. “And an increase of 70 cents is not a huge jump in the wage.”

At the time Congress passed the wage increase, U.S. unemployment was 4.7 percent. Since then the jobless rate has more than doubled to 9.5 percent, according to the most recent government statistics.

“The timing of the increase was set for political and not economic reasons, and two years ago, no one was predicting that unemployment would double,” Burtless said.

The meltdowns in the financial and housing markets and in the automobile industry have been the primary reasons for the spike in unemployment—and not the increase of the minimum wage, most economists agree. Burtless and other economists point to the fact that the number of people holding minimum wage jobs is relatively small compared to the rest of the U.S. labor market. The U.S. Bureau of Labor Statistics reports that approximately 5 million workers are paid less than $7.25 an hour.

“It’s a fairly small segment of the labor force, so the overall impact might make a ripple but not any large waves in the economy,” Burtless said.

Because the minimum wage in 21 states and the District of Columbia is higher than $7.25 per hour, the effect of the federal wage increase will be modest. Still, some economists have stated that the wage increase will undermine further a very weak U.S. labor market.

“Wage hikes always cause a spike in the unemployment rate, and with the country in the middle of a recession, businesses are already struggling to make ends meet. The economy will continue to hemorrhage entry-level jobs unless legislators stop this summer’s minimum wage hike from happening,” said Kristen Lopez Eastlick, a senior research analyst with the Employment Policies Institute in Washington, which is funded by businesses and employer groups.

Eastlick claims that the negative impact from increases to the minimum wage is particularly hard on young workers. She points to the second phase of the federal minimum wage increase, which raised the wage from $5.85 to $6.55 in July 2008, and says statistics gathered by her group show that unemployment of teenage workers rose by 5 percent following the 70-cent raise.

“For this reason, we are asking lawmakers to put the July 24 federal minimum wage increase on hold,” said Eastlick.

Other analysts and economists believe that raising the minimum wage has an overall positive effect on the economy. The Economic Policy Institute, which is funded mostly by labor unions, estimates that the wage increase will add $5.5 billion to the economy and that this money will improve the buying power of consumers. Heidi Shierholz, an economist with the Institute, says that with the struggling U.S. economy, “it is actually a good time to raise the minimum wage.”

John Challenger, president and CEO of outplacement firm Challenger Gray and Christmas in Chicago, agrees with Shierholz, saying that people who are in minimum wage jobs tend to spend available funds on consumer goods.

“If they have the money, they will spend it,” said Challenger, whose labor market forecasts are cited often by the media. “This increase does hit at a bad time, but I think the positive will ultimately outweigh the negative effects.”

Bill Leonard is senior writer for SHRM Online.
Society For Human Resource Management
August 2009.