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Minimum wage increase still pretty “minimal,” but impact on businesses may be great

July 23rd, 2009  |  Lucas Otto

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On Friday, July 24, 2009, the federal minimum wage increases to $7.25 per hour, and with that increase, millions of citizens will see a boost in their weekly pay. That’s the good news. The bad news is that this increase does not even begin to raise working families above the poverty threshold, and many businesses may view this as just another cost that will inevitably eat away at their already struggling profit levels.

No one will ever turn a blind eye toward more money; in fact, while this increase is federally mandated, many businesses already offer higher minimum wages to their employees. Yet, it is impossible to ignore the fact that if an employee works 40 hours a week at $7.25 an hour, they will make $290.00 a week, or $15,080 a year (before taxes). Factor in higher gas prices and other bills, and a family of three is still well below the federal poverty guideline of $18,310, so any expectation of an “up tick” in the economy due to this increase seems more wishful thinking rather than reality.

But it isn’t just workers who will be feeling this increase. Employers, both big and small, will either have to bump those employees making less up to the minimum, or they will have to give small increases to those already making more, because they can’t pay existing employees the same as those just beginning their employment. The problem is, with decreased revenues due to the current economic downturn, this increase could not come at a worse time. Since the increase is so minimal, employers probably aren’t figuring that it will lead to greater consumer spending by the very employees getting the increase, which is the hope of many employers as wages increase.

To many employers, the math adds up as follows:

Hourly wages raised + continued economic downturn + continued downward trend in consumer spending = potentially less money coming in while more money goes out.

No one generally knows what this means for business, but if one could speculate, it could mean the loss will be passed on to consumers in the form of higher-priced products. In addition, it could mean fewer workers hired, or more workers fired, or an across-the-board reduction in hours. The fact is, an increase in the minimum wage was needed, but the amount will do little to change many families’ fortunes, whereas it may do a great deal to change how businesses hire and deal with employees and hours.

It remains to be seen what the trickle-down effect of this increase will mean to employees, businesses and consumers. Those who feel that the increase is bad for the economy and those who feel it is positive have both stated their cases (see video below). However, with the economy in a condition of instability, the road to economic recovery might get a little bumpier.

Video Discussing Pros and Cons of Minimum Wage Increase
(Opinions expressed in video are not those of CCH Workday)

For further analysis, read Don’t believe the hike, say opponents of minimum wage increase.