Wage law may cost jobs

ATLANTA – A federal minimum wage increase that takes effect today 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 states – including Idaho and Montana – 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.

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.

Miller’s view is a tough sell to employers of minimum-wage workers – from hotels to day cares to burger chains – who find themselves having to cut larger paychecks as their revenues continue to shrink. 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.

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 equal 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.