Federal minimum wage increases—but so do prices

The federal minimum wage rises 70 cents to $6.55 today, giving about 2 million Americans a raise, according to the Associated Press. The increase is the second of three annual increases required by a 2007 law; next year, the minimum wage will increase to $7.25.

However, this increase comes amid higher gas and food prices and a struggling economy. As a result, the wage increase may not affect workers significantly.

The minimum wage increase is "a drop in the bucket compared to the increase in costs, declining labor market and declining household wealth that consumers have experienced during the past year," says Zach Pandl, economist for Lehman Brothers, New York.

Last week, the U.S. Department of Labor reported 5 percent inflation for June compared with a year earlier—the fastest inflation since 1991. Energy costs rose almost 25 percent, and food prices rose more than 5 percent. The new minimum wage is less than the inflation-adjusted 1997 level of $7.02 and well below the inflation-adjusted level of $10.06 from 40 years ago.

Some small businesses are already planning to increase prices to offset the higher wages they have to pay; for example, the minimum wage could push food prices higher because employers have to pay a higher wage to agricultural workers.

However, Brian Bethune, chief U.S. economist at Global Insight Inc., Boston, says he does not expect it to have a major effect on the economy because recent increases in productivity are keeping labor costs in check as companies are able to produce more with fewer workers.

Twenty-three states and the District of Columbia—covering 60 percent of U.S. workers—have laws making the minimum wage higher than the federal minimum wage. When the minimum wage increases next year, more than 5 million workers will get a raise.

Date : 7/24/2008