The minimum wage will increase on July 24 - but is it a good idea?

Within the next couple of weeks, the federal minimum wage will increase from its current level of $6.55 per hour to $7.25 per hour for non-tip employees. The pay rate for tipped employees will remain at $2.13, but employers are still responsible for monitoring tip income and paying any shortfall to their employees.

This wage increase is the third of three annual increases that were prescribed by Congress and signed into law by President Bush in 2007. In three short years, the minimum wage has increased from $5.15 to $7.25 per hour – a staggering 41 percent increase! It’s great for political posturing to announce an increase in the minimum wage, but is it sound economic policy? Historical statistics would seem to say 'no'.

The most popular argument for minimum wage increases is that the increase would allow workers to better provide for their families. However, Department of Labor statistics indicate that most minimum wage workers are not the breadwinners of their households. In fact, the overwhelming majority of minimum wage workers are either part-time or student workers and are not responsible for supporting their families. In fact, the Economic Policies Institute reports that only 2.8 percent of minimum wage earners were single parents, and only 1.2 percent of minimum wage earners were listed as adult heads of household. It is estimated that 57 percent of minimum wage earners are single people – mostly students.

Also worth considering is the fact that the last several minimum wage increases have spurred increases in dropout rates. At-risk high school students see the ability to make more money immediately and choose to leave school to do so. Numerous studies have shown how much less the average high school dropout will earn over his or her lifetime than the average graduate.

Finally, it can be argued that raising the minimum wage can actually lead to increased unemployment rates. When businesses – particularly small businesses – face increasing labor costs, their choices are to absorb the costs or pass them through to their customers. In a tight market, neither of these options become particularly attractive. Remember, this increase not only means raises for those currently earning the minimum wage, but also any employee whose pay scale is somehow tied to the minimum. That guy making $9 per hour is going to want a raise too! Since they can’t raise prices, and they can’t absorb the costs, the business’s only way to control the bottom line is to eliminate jobs. When the minimum wage increased from $4.25 to $5.15, the Joint Economic Committee of the House of Representatives estimated that between 100,000 and 625,000 entry level jobs were lost.

Particularly in a tough economy, the rising minimum wage could put an incredible strain on businesses. There is a rising chorus of voices asking Congress to delay or repeal the upcoming increase. If you have a vested interest in this issue, now is the time to make your feelings known by contacting your local Congressman.

--Dan Musick