Does Raising the Minimum Wage Really Reduce the Number of Jobs?

Minimum Wage Business groups have long argued that raising the minimum wage not only increases costs for employers, but also reduces the number of jobs. And given the nation's stubbornly high unemployment rate, the last thing the economy needs is fewer jobs.

Labor advocates, however, have long resisted the argument that paying workers more means employers can afford fewer of them, and a new study suggests they may be right. Researchers at the University of California, Berkeley, have found that raising wages for the nation's lowest-paid workers not only reduces unemployment but also provides the economy with a boost, since higher pay -- even for those at that margins -- results in more disposable income.

The problem is, of course, given the current political environment, the likelihood of Congress acting to boost the federal minimum wage is practically nil. The lack of action on the federal level has put the onus on states to increase their mandates in order to give minimum-wage workers a raise.

But many aren't anxious to take up the cause, fearing that any rise in state-wage floors may stifle job creation and provide business leaders with ammunition in defending layoffs or moving jobs out of state.

Illinois, in a bid to help reduce that state's 8.8 percent unemployment rate (which matches the nation's overall unemployment for March) has proposed to raise its minimum wage to $10.65 an hour during the next four years, NPR News reported, but so far has been unsuccessful.

In fact, the broadcast news organization noted, no state has voted to increase the minimum wage this year. According to U.S. Department of Labor, 17 states plus the District of Columbia have laws that set wages higher than the federal minimum of $7.25 an hour, last raised in 2009. Another 24 states require wages paid by employers equal the level set mandated by Washington.

The hospitality industry, which employs large numbers of minimum-wage workers, has been among the most vocal in opposing federal or state wage hikes. Such mandates force employers to cut hours, increase prices or slash jobs, according to the National Restaurant Association, a trade group.

In a bit of good news for workers, however, a recently released survey shows that the restaurant industry is nonetheless prepared to increase wages after two years of wages freezes. Survey results, which are based on 2011 budget information, project an increase of 3 percent in wages for restaurant workers -- in line with the 2.8 percent rise forecast for industry generally.

"Sales and profit have been improving in the [restaurant] industry and, while salary growth has been modest the past couple of years, organizations are feeling more confident in increasing their fixed labor costs," says Tom McMullen, vice president at Hay Group, a management consulting firm, which along with the Chain Restaurant Compensation Association commissioned the study.

With the economy brightening, restaurant owners are concerned they may lose workers to competitors and are more willing to increase compensation to retain key talent. "During the economic recession we asked more of our people -- more hours, heavier workloads -- while at the same time reducing or eliminating performance-based pay increases," McMullen says.

Such sacrifices have been made by workers across the whole of the U.S. economy, suggesting that other sectors may also expect that wages may rise, albeit modestly, as the economy continues to improve. Still, workers earning minimum wage have a long way to go to make up for ground lost because of the lack of legislative action in recent years.

After accounting for inflation, the current $7.25 federal standard works out to about $5.30 an hour, using constant 1996 dollars, based on Bureau of Labor Statistics data. While that's better than in recent years (in 2006, the then-current $5.15 hourly minimum was equal to $4.14 an hour), minimum-wage earners throughout the 1960s and '70s fared fared better than that group does today. The $1.60-an-hour rate imposed in 1968, for example, is equivalent to $7.21 an hour in 1996 dollars.

Had Congress acted to tie the rise in minimum wages to the rate of inflation (as is the case with some states), the current federal standard would be $8.83, based on 1971 dollars, NPR says.

Next:Companies Hiring This Week

Related Stories from GlassDoor

Read Full Story