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Raising The Minimum Wage Has Problems

Earlier this week Connecticut become the first state to raise the state minimum wage to $10.10 per hour over the next three years following President Obama announcement that he was going to raise the minimum wage to $10.10 per hour for workers on Federal contracts. While the President called on Congress to follow his example and increase the Federal minimum wage for all workers to $10.10 per hour. The U.S, Congress has been reluctant to increase the Federal Minimum Wage. States are able to increase their minimum wage but only a few states have stepped up and increased the state minimum wage which can be higher than the current Federal minimum wage of $7.25 per hour. Last year California had moved to increase the minimum wage to $10 per hour by July 2016.

The Department of Labor rules applies the minimum wage that most benefits the non-exempt employee. For example if a state such as Florida has a minimum wage of $7.93 an hour and the Federal minimum age is at $7.25 an hour the employer is required to pay the highest wage which is the state wage. On the other hand a state such as Minnesota has a minimum wage of $6.15 per hour so an hourly workers must be paid the Federal minimum wage in that state.

Increasing the minimum wage is coming at a bad time. Employers are still cautious about increasing payrolls through hiring. Changing the minimum wage will be another new government mandated expense. Having weathered the Affordable Care Act employers are still uncertain about the financial impact the cost of current payroll. Raising the minimum wage will reduce company profits. As a result companies will pass the increase labor expense on to consumers increasing inflation which has been stable during the several years. Or the employer could reduce payrolls through layoffs.

With a higher minimum wage expect a wage ripple effect known as wage compression. For example the hourly workers now earning $11 will perceive they have lost income should the minimum wage climb from $7.25 per hour to $10.10 per hour. Those $11 per hour workers will expect a comparable increase to stay ahead of the new entry level minimum wage. Likewise, lower salaried employees would feel they are closer to a minimum wage of $10.10 and pressure employers for pay increases. So while some low wage workers earn more, other workers will lose income. When employers do not respond quickly or equally to adjust wages for unhappy workers those workers may respond with litigation.

Raising the minimum wage will likely impact company morale or production output as many employers already pay $.50 to $2 above the required Federal minimum wage. Part of the reason companies pay more than the minimum age is to attract better workers or reward for seniority or loyalty to the company. Those who fall are earning better than minimum wage will expect a reflective dollar amount increase above the $10.10 per hour. Contributing the wage compression problems employers will face.

While increasing the minimum wage will be a raise for some workers, companies will hold off on adding new employees and with 10.5 million unemployed, those millions who are among the long term unemployed, the prospect to getting hired becomes more distant. Increasing the Minimum wage will diminish the hope for long term unemployed to find a job and they will drop out of the labor force. This artificially lowers unemployment without boosting consumer confidence. Meanwhile government assistance has been and will continue to increase as the middle class erodes and poverty grows. Workers in states such as California and Connecticut that already have state minimum wage above the Federal minimum wage also have state unemployment rates above the national unemployment rate. Meanwhile states that are well below the national unemployment such as North Dakota and Texas match the Federal minimum wage of $7.25 per hour.

The debate on increasing the Federal or state minimum wage rages on. In February the non partisan Congressional Budget Office (CBO), released a report on The Effects of Minimum-Wage Increase on Employment and Family Income with mixed results. The report addresses the impact of raising the Federal Minimum Wage from $7.25 per hour to $10.10/hr by 2016. The National Employment Law Project (NELP) has been a proponent for increasing the Federal minimum wage and points to the positive impact of increasing the Federal minimum wage.

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