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Don’t believe the hike, say opponents of minimum wage increase

June 12th, 2009  |  Lisa Milam-Perez

>Hold off on that next minimum wage hike, urged David Neumark, a professor of economics at the University of California, Irvine, in an opinion piece in today’s Wall Street Journal.

The federal minimum wage is scheduled to increase to $7.25 per hour in July, from the current rate of $6.55. It’s the last in a three-step increase in the minimum wage rate enacted under the Fair Minimum Wage Act of 2007, a happier time — economically speaking — when the nation’s unemployment rate stood at a modest 4.5%. The 2007 rate hike, the first in ten years, broke the longest stretch without an increase since the Fair Labor Standards Act (FLSA) was passed in 1938. But now, “with the aggregate unemployment rate at 9.4%, the teen unemployment rate exceeding 22%, and the unemployment rate for black teens nearing 40%, next month’s increase seems like the worst timing possible,” Neumark wrote. He warns that the 11% minimum wage increase will lead to the loss of an additional 300,000 jobs among teens and young adults — “on top of the continuing job losses the recession is likely to throw our way.”

“Minimum wages, like most public policies, confront us with trade-offs,” Neumark notes. “An employed, low-skilled worker who keeps his job earns a slightly higher wage. But a worker who loses his job, or a labor-market entrant or unemployed worker who cannot find a new job, pays a much higher cost.”

It’s a debate that has raged for decades: Does a minimum wage increase boost the wages of our lowest-paid workers, or does it put them out of work? It depends on whom you ask.

Minimum wage hikes increase consumer spending, says the Economic Policy Institute, a nonprofit think tank, citing a study by economists at the Federal Reserve Bank of Chicago. The organization claims the first two increases in July 2007 and July 2008 will have generated an estimated $4.9 billion of spending by July 2009, and that the coming rate hike will bring in another $5.5 billion over the following year. The results demonstrate that an increase in the minimum wage benefits not only low-income workers, but boosts consumer spending and the broader economy as well, the Economic Policy Institute says.

Hogwash, counters the Employment Policies Institute. (The similarly named think tanks have been sparring on the issue for years.) The Employment Policies Institute has long asserted “the time-tested economic consensus” that minimum wage hikes lead to job loss for low-skilled employees. Responding to the most recent study, Kristen Lopez Eastlick, its senior research analyst, said university-conducted economic research “overwhelmingly runs counter” to the Economic Policy Institute’s claims. Various studies continue to affirm that increases in the minimum wage are poorly targeted to benefit low-wage families, as Census Bureau data shows the average family income of minimum wage employees is nearly $45,000 a year.

“In fact, the federal minimum wage hike has priced employees out of the workforce, and based on recent data from the Bureau of Labor Statistics, it’s the low and unskilled workforce — especially minority teens — who are getting hit the hardest.”

On the other hand, the Fiscal Policy Institute and Policy Matters Ohio reported a few years ago that, since 1997, states with higher minimum wages have generally performed as well or better economically than states with lower minimums. The findings were consistent, the groups said, with “a growing body of economic research that has called into question the long-held prediction that a higher minimum wage will reduce the number of jobs or the number of hours worked by low-wage workers.”

To be sure, when enacted in 1938, the FLSA’s purpose was to grow jobs. The overtime provisions of the Act intended to spread the job wealth by making it costlier for employers to work their current employees more than 40 hours in a workweek. But the legislation also sought to eliminate labor conditions that were seen as detrimental “to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” (29 U.S.C. 202(a)). Thus, the minimum wage. There was a floor below which no American worker should be expected to work, Congress reasoned. It is the friction between these two competing goals, perhaps, that has led to the discord we see today.

In the end, Neumark laments: “I do not expect President Obama or congressional Democrats to give up their long-held support for a higher minimum wage.” Indeed, the minimum wage hike is likely a done deal. But the battle over its wisdom will rage on.