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Minimum Wage Hike Means More Recession?

A federal minimum wage increase that takes effect Friday could prolong the recession, some economists say, by forcing small businesses to lay off the same workers that the pay hike passed in better times was meant to help.

The increase to $7.25 means 70 cents more an hour for the lowest-paid workers in the 30

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states that have lower minimums or no minimum wage.

It also means higher costs for employers who feel they've already trimmed all their operating fat.

"How will they absorb the increase?" said Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center. "They will either hire less people or they will do less business."

More than in any period before, businesses are likely to lay off employees and reduce hours, further fueling the economic slump in states seeing double-digit unemployment rates, fiscal conservatives and some economists say.

Minimum wage advocates counter the wage bump will keep more working poor afloat, and say more increases are needed to help stimulate consumer spending and strengthen businesses in the long run.

It's an old policy debate that resurfaced when Congress passed the increase two years ago and has taken on urgency as the nation's fiscal funk has deepened.

In the end, it's the workers and their employers who find themselves caught in the middle.

At Bench Warmers Bar and Grill in the southeast Kansas farming town of Chanute (pronounced sha-NOOT), owner Cathy Matney has decided to let some of her dishwashers go rather than pay all 22 of her employees more.

"It's bad timing," said Matney, whose waitresses and cooks will have to pitch in with scrubbing pots and pans.

"With the economy like this, there's a lot of people who are out of work and this is only going to add to it." Ryan Arfmann, who owns a Jamba Juice shop in Idaho Falls, Idaho, will be cutting hours to his staff, which is made up largely of college students, high schoolers and homemakers who want to make a few bucks.

"Am I going to fire anybody, no," Arfmann said. "But kids understand there's going to be hours cut." Arfmann said he wishes the increase was spread out over a few more years, to make it easier for him to absorb the costs.

He also is concerned that he'll end up having to give everybody raises just to maintain pay differentials between employees.

"People who are already getting paid above $7.25 are going to feel like they need raises as well," he said.

"It's harder for me to reward employees that are doing well because of minimum wage being so high." Backers of the increase say it's long overdue for millions of the nation's working poor.

Rep. George Miller, D-Calif., authored the 2007 minimum wage legislation, which increased pay for the first time in a decade.

"A higher minimum wage helps working families' budgets and results in increased spending on local business, which is good for everyone," Miller said in an e-mail.

He did not say whether he would have pushed to raise the minimum wage in an economic climate like the current one, and he did not immediately respond to a message left Thursday

with his spokesman.

Miller's view is a tough sell to employers of minimum wage workers—from hotels to daycares to burger chains—who find themselves having to cut larger paychecks as their revenues continue to shrink.

The effects could be especially harsh in the seven states—Alabama, Florida, Georgia, Indiana, North Carolina, South Carolina and Tennessee—where the pay increase coincides with double-digit unemployment.

"Wherever you have the higher unemployment rates, that's where the business conditions are bad—and that's where a minimum wage increase will have an impact on the negative side," said Dhawan, the economist at Georgia State.

Dhawan said the strain could be felt equally in metropolitan areas, where fast-food chains and franchises employ large numbers of minimum wage workers, and in smaller towns where the bulk of the work force may be concentrated in one, low-earning sector.

Fewer workers employed, meanwhile, reduces the amount of money in circulation — dampening any consumer spending spike the wage boost could have created, Dhawan said.

"The increasing power from the higher wages will be swamped by the losses from the people who lost jobs," he said.

Marilynn Winn, an Atlanta woman who earns $6.75 an hour — a couple of dimes more than the current $6.55 federal minimum — driving cars between auto auctions, worries the pay boost could lead her boss to make cuts, especially to older workers like herself.

Still, she said she'd be grateful for the raise if she gets to keep her job.

"We could use more, the more the better," said Winn, 58.

Sara Campbell, who earns roughly $786 a month cleaning event spaces in Atlanta, said she's unlikely to spend any money she gets from the minimum wage increase, especially since she worries her hours will get cut.

"You never know," she said. "You might lose your job. They might start laying off and if they lay off, I'll have something saved up."

Played out across enough businesses, that pattern could stunt economic recovery nationwide, said Moody's economist John Lonski.

"You're going to get fewer jobs created," said Lonski, who predicted national unemployment would peak at 10.5 percent in the first quarter of 2010.

"It's not a backbreaker for the U.S. economy, but it doesn't help stabilize employment, especially since most businesses now suffer from much lower than expected sales." It's hardly the first time a wage increase has prompted doom and gloom predictions from economists, who point to conventional business thinking that supports the idea that higher costs plus lower revenue equals a shrinking work force.

More upbeat predictions suggest the wage increase could actually play a role in turning around the nation's finances.

Labor Secretary Hilda Solis said Thursday that the wage increase will generate an extra $5.5 billion in consumer spending over the next year.

Economists have largely overlooked the positive effect on consumer buying power, according to Holly Sklar, senior policy adviser for Let Justice Roll, a national campaign aimed at increasing the minimum wage to $10 by 2010.

A further wage increase could eventually become a reality: One of President Barack Obama's campaign promises included raising the minimum wage to $9.50 an hour by 2011.

"You can't have an economy that's based heavily on consumer purchasing power, and at the same time, not pay the consumer enough to live on," Sklar said.