Minimum Wage Increases – Will $5 Extra Really Help or Hurt

At the end of July the federal minimum wage jumps to $7.25 an hour from $6.55, according to the US department of Labor. However, many question if this will help or hurt low income workers and the small business that employ them.

The minimum wage has increased over the last few years to the latest amount of $7.25. Most states have their own minimum wage, and employers are required to pay whichever is higher. That means minimum wage workers will get a raise in 29 states and Washington, D.C. In the remaining 21 states, they’ll see no change.

** See this updated article on latest minimum wage increase.

The increase to $7.25 means 70 cents more an hour for the lowest-paid workers in the 30 regions 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.

Will the minimum wage increases (about $5 p/day) really make a difference for millions of Americans who are on minimum wage, already struggling with higher gas and food prices in one of the worst recessions on record?

The minimum wage adjustment is an almost 12% raise, but most of it will be eaten up by inflation which is officially running at close to 5% annually – unofficially it is much higher with basic groceries up more than 20% in many states.

The minimum wage hike is “a drop in the bucket compared to the increases in costs, declining labor market, and declining household wealth that consumers have experienced in the past year,” Lehman Brothers economist Zach Pandl said in a recent USA today article.

The new minimum wage is less than the inflation-adjusted 1997 level of $7.02, and far below the inflation-adjusted level of $10.06 from 40 years ago, according to the Labor Department inflation calculator.

Some small businesses are already making plans to raise prices to offset the higher wages they have to pay their workers. “There just isn’t any room for profit, and so this is why prices will have to go up,” one small business owner said. “I have to recoup those costs.”

This will just further drive inflation and erode wages for everyone, and unless productivity improves we will end up in a vicious “wage-price inflation spiral”. Still for a number of workers this mandated raise is better then nothing given most business were planning modest or no pay raises this year thanks to the tough economic climate.

What would you do with $5 extra a day, which is about $100 a month? Would it make a real difference in your life or would you fritter it away on unnecessary spending.

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