The new minimum wage: Will it just increase layoffs?

Big financial events bring economists and analysts out of the wood work, anxious to give their opinions and get their names in the media. The increase in the minimum wage, which is effective today, is a prime example. The federal minimum wage will go from $6.55 to $7.25. That is an 11 percent hike, which is a pretty healthy bump.

Some states already have minimum wages above $6.55, so workers in those state will get a smaller benefit. The national increase is a big enough jump that some small businesses may not be able to handle the increased expenses. And some large businesses with a lot of low-end workers could use the increase as an excuse to cut more workers.

So, does the hike in the minimum wage bring in more tax revenue because more people are making more money? Or does it cause more layoffs, which effectively shrinks that tax base? The same can be asked about consumer spending: Will it rise because people are making more money, or drop as minimum-wage earners are let go?

The effect on employment is likely to be negative because of the combined impacts of the increase in wages and a lack of availability of credit. If the federal government wanted to lessen the strain of a wage increase on small businesses, it should have made provisions for tax breaks for firms with payroll below a certain level or created a way for these firms to get access to capital in an environment when banks are unlikely to lend money, particularly to operations that are small and risky.

Hiking the minimum wage might have had a small effect on the economy if it had been combined with other programs. As it is, the move will cause a lot of layoffs.,feedConfig,entry&id=408318&pid=408317&uts=1248443261
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Geert Vanden Wijngaert, AP
Geert Vanden Wijngaert, AP

Douglas A. McIntyre is an editor at 24/7 Wall St.

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