WASHINGTON -- The final raise in a three-step minimum-wage increase took effect last week amid dire forecasts it will worsen unemployment as struggling businesses slash jobs to cut their costs.
The federal minimum-wage increase, enacted by Congress two years ago, rose by 70 cents, or nearly 11 percent, to $7.25 an hour. But with the unemployment rate at 9.5 percent and likely to climb over 10 percent in the coming months and higher still by year's end, this is the worst time to be increasing wage costs on employers.
Lawmakers imposed the hefty wage increase when the economy was doing reasonably well, but made no effort to repeal or postpone the wage hike as the country fell into a deep recession and businesses laid off workers by the millions.
Supporters of the wage increase, especially labor unions, argue that a higher minimum will be a boon to low-income workers. But studies show that as the minimum wage rises, businesses reduce jobs or hours worked to lower operating costs. This is especially true when economic times are rough, incomes are down, and businesses are fighting to keep their heads above water.
"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," according to a recent analysis at SmartMoney.com.
A study last summer in the Journal of Labor Research found that a 10 percent increase in the minimum wage led to a 0.9 percent to 1.1 percent drop in retail jobs and up to a 1.2 percent decline in overall small-business employment.
This is happening in the current recession where businesses large and small have been laying workers off in droves, and the higher minimum has only made a grim jobs picture even gloomier.
"It's my impression that employers of all sizes have no excess revenue that they can apply to increasing wages. They are either in the process of cutting down or trying to survive," said Marc Freedman, director of labor law policy at the U.S. Chamber of Commerce.
"Connect all the dots and you end up with a picture of businesses that don't have excess revenue or cash reserves that they can fall back on," Freedman told me. "I think the impact (on job losses) will be larger than many people envision.
"The logical impact of this, especially for unskilled entry-level workers, is that they will likely have a harder time getting some of those jobs than they did before," he said.