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Thoughts About the Federal Minimum Wage Rate Increase
The federal minimum wage rate increased from $5.85 to $6.55 per hour today, a 12% increase. This is the second of three scheduled increases. The first increase occurred a year ago today and raised the federal minimum wage from $5.15 to $5.85 per hour. The next increase, which will raise the federal minimum wage to $7.25 per hour, takes effect on July 24, 2009. All totaled, these hikes result in a federal minimum wage rate increase of $2.10 (from $5.15 to $7.25), or 41%, in just two years. Here are a couple of thoughts about this:
The Increased Cost to Employers Will Be Passed on to Consumers
A number of articles I have read have raised the question of whether or not businesses will be forced to pass the increased cost of their labor onto the consumer. I think this question is absurd. Of course businesses will pass the increased cost on to their consumers. People run businesses to generate profits. When their costs go up, they either become more efficient or raise their prices. Businesses probably won't increase their prices today, but ultimately they will have to. That said, raising prices is not a bad thing.
Companies set prices with the goal of maximizing profits and the market determines what a company can charge for its products. The increase in the federal minimum wage rate will affect some products and services more than others, and therefore might impact which products and services generate the most profit. As a result, some businesses will be hurt and some will be helped by the raise of the federal minimum wage rate. So, there will be change. Some consumers might choose to change some of their habits. This is not a bad thing. It's just the market adjusting to a new reality (increased cost of labor).
I Want a 41% Raise Over 2 Years! But Let's keep Things in Perspective...
Most people would be delighted to see their salary increase by 41% in just 2 years. However, most people probably would not like to try to feed their families on $7.25/hour. There are very good arguments for and against the minimum wage, and a discussion of whether it is or is not a good thing is far beyond the scope of this blog. Given that there is one, however, it is interesting to compare the current minimum wage rate with past minimum wage rates. Doing this makes me think that $6.55, and even $7.25, is really not that high. The rate in 1968 was $1.60 per hour which, adjusted for inflation, is equivalent to $10.06 per hour today. The rate in 1997 was $5.15 per hour, the equivalent of $7.02 today. Finally, because the federal minimum wage rate did not change between 1997 and 2007, that 41% pay increase over 2 years was also a 41% pay increase over 12 years. Now it doesn't seem so high.
