Democratic economics at work

The new Federal minimum wage goes into effect today. The net effect on the economy? Unemployment of the poorest Americans will increase, inflation will rise slightly, and economic growth will soften. The vast majority of workers, however, are making more than the minimum wage so the degree of the effect of this will be relatively small. However, many small companies are going to feel the wage crunch and will respond by cutting hours, cutting employees, or cutting benefits while raising prices.

Minimum wage hike kicks in Tuesday
USA Today

A new federal minimum wage will go into effect Tuesday, the first in a series of wage increases heralded by some low-income advocates but criticized by business leaders as a potential financial blow.

The minimum wage that takes affect today will boost pay for covered, non-exempt employees to $5.85 an hour from %5.15. The next jump will occur on July 24, 2008, to $6.55 an hour, and then to $7.25 an hour effect July 24, 2009.

"The first step is incredibly modest, a 70-cent increase," says Liana Fox, an economic analyst at the Economic Policy Institute (EPI), a non-profit think tank that receives some funding from labor groups. "But by the third wage increase, 12.5 million workers will see wages go up. People see this as the right, moral thing to do."

Already, 30 states and the District of Columbia have minimum wages higher than the federal, so only 20 states will be affected by the first wage increase today. More than 70% of workers live in states where state minimum wages already trump the new federal wage increase, according to EPI.

In cases where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.Marc Freedman, director of labor law policy at the U.S. Chamber of Commerce, says the higher federal minimum wage could mean fewer hours for employees, fewer pay increases for other employees, benefits reductions, job losses and waning job creation.