Lisa Scherzer of Smart Money writes in the Wall Street Journal that Millions of American workers are about to get a federally-mandated raise, but the recession has left many wondering if and how the economy will benefit.

The raise, which will go into effect on July 24, represents the final wage hike in a three-step boost to the federal minimum wage increase passed by Congress two years ago. The minimum wage will rise 70 cents — or about 11% — to $7.25 per hour from $6.55. (Last summer, it went up 70 cents from $5.85.)

Whether Congress would have approved the wage hike had legislators known how dismal the economy would look two years later is an open question. But there’s no doubt the timing is awkward.

“There’s low inflation, high unemployment and this is when teens are looking for summer jobs,” says Mike Gibbs, a professor of economics and human resources at the University of Chicago.

The hike will give about 4.5 million workers a raise and boost hourly wages by $1.6 billion a year, according to the Economic Policy Institute, a nonpartisan think tank in Washington, D.C.

The final phase of the federal minimum wage hike will impact 31 states whose minimum wage levels are below $7.25, including Florida, Pennsylvania, Nebraska and New York. Firms in these states will have to match the federal minimum. The increase has no bearing on 20 states (including Washington, D.C.), which already mandate an hourly wage of $7.25 or more.

Wage hikes are always controversial pitting employees against employers and triggering historical arguments over the legacy of trickle-down economics. Yet this hike comes at particularly poignant moment for all sides. Employers are strapped and facing new benefits requirements, while workers are struggling to pay their bills.

For many workers the increase is a boon. It might mean being able to afford a visit to the doctor or college textbooks for the fall semester. But given the 26-year high unemployment rate and the fact that so many companies are hamstrung by the gloomy economic climate, some might see a mandatory wage increase as a setback in terms of hiring and pricing.

Here are a few ways the federal minimum wage increase might affect you.
Job seekers stand to lose

A mandated raise won’t do job seekers any favors especially if they’re looking for temporary or entry-level positions. Studies suggest that increasing the minimum wage has a slightly negative effect on the job market. A 10% increase in the minimum wage is associated with a 0.9% to 1.1% decline in retail employment and a 0.8% to 1.2% reduction in small-business employment, according to a study published in July 2008 in the Journal of Labor Research.

Minimum wage increases typically target low-wage, low-skilled workers as well as teens and young adults. The industries that rely most on minimum-wage workers include fast food restaurants, small-scale independent retail stores, day care establishments and hotels.

The prospects for a teen looking for work are grim, and the wage hike may exacerbate their problems. The unemployment rate for 16- to 19-year-olds climbed to 24% in June, according to the latest Labor Department data, more than double the national rate of 9.5%. The mainstays of summer youth employment — movie theaters, restaurants and mall stores — are increasingly turning to older workers or scaling back their hiring amid cutbacks.

With a higher minimum wage, already-cautious companies will decide they can do without some of their low-wage, low-skilled positions. They’ll use less low-wage labor, cut their hours or drawn on more skilled workers if they can.
Low-skilled and younger workers stand to gain – if they’re working

Those who manage to snag a minimum wage job or hold on to their existing one stand to gain. “There’s an economic argument to be made that when you push things up at the bottom during a recession, you’re pushing more money into the pockets of people who are surely going to spend it and not going to save it,” says Chip Hunter, an associate professor of management and human resources at the Wisconsin School of Business.

Also, there might be a silver lining for part-time workers. Firms looking to cut costs may promote their part-timers to full time instead of hiring new minimum-wage workers, which would be more expensive, Neumark says.
Some consumers could see higher prices

Overall, the effects of the wage increase will be small, Gibbs says. Most companies knew a hike was in the offing and planned accordingly. However, for those businesses that rely heavily on low-wage workers, higher costs could trigger higher prices. “If costs go up, you have to pass some of that to your customers,” he says. Where consumers might see higher prices and by how much is difficult to predict.

A 2005 study showed that restaurant prices rose in response to an increase in the minimum wage. (The report’s authors looked at the “food away from home” component of the Consumer Price Index during a three-year period with two federal minimum wage increases.)

But even though fast food restaurants will feel the brunt of these wage hikes in terms of labor costs, they are unlikely to respond by bumping the prices for a cheeseburger and fries. “I don’t think [restaurants] can raise prices much more. They might just absorb it,” says RJ Hottovy, a retail analyst at Morningstar. In the past year or so, restaurants were more apt to jack up prices. For example, Chipotle raised prices on some food items last fall. But times have changed, Hottovy says. “I think we’re in a different situation now. Consumers are cash-strapped as it is,” he says.

Restaurants were hit hard by food inflation in 2007 and 2008 and had no choice but to raise prices then. “That has ameliorated a bit,” says Mike Donohue, a spokesman for the National Restaurant Association, an industry group. “But restaurants are reluctant to raise prices significantly because they don’t want to push away customers.”

Wall Street Journal