The federal minimum wage increase that took effect 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 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.
At Bench Warmers Bar and Grill in the southeast Kansas farming town of Chanute (pronounced sha-NOOT), owner Cathy Matney has decided to let some of her dishwashers go rather than pay all 22 of her employees more.
“It’s bad timing,” said Matney, whose waitresses and cooks will have to pitch in with scrubbing pots and pans. “With the economy like this, there’s a lot of people who are out of work and this is only going to add to it.”
Ryan Arfmann, who owns a Jamba Juice shop in Idaho Falls, Idaho, will be cutting hours to his staff, which is made up largely of college students, high schoolers and homemakers who want to make a few bucks.
The effects could be especially harsh in the seven states — Alabama, Florida, Georgia, Indiana, North Carolina, South Carolina and Tennessee — where the pay increase coincides with double-digit unemployment.
“Wherever you have the higher unemployment rates, that’s where the business conditions are bad — and that’s where a minimum wage increase will have an impact on the negative side,” said Dhawan, the economist at Georgia State.
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.
One of Obama’s campaign promises included raising the minimum wage to $9.50 an hour by 2011.