When more means less

The last 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, thanks to a law 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 to more than 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 increase when the economy was doing reasonably well but made no effort to repeal or postpone it as the country fell into a deep recession and businesses were laying off workers by the millions.

Supporters of the 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,” said SmartMoney.com in a recent analysis.

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, when businesses large and small have been laying workers off in droves, and the higher minimum wage has only made a grim jobs picture even gloomier.

“It’s my impression that employers of all sizes have no excess revenue 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,” Mr. 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.

Other business groups I have talked to predict the negative effect of the higher minimum wage on jobs will be significant.

“Every dollar the minimum wage mandates comes out of somebody else’s pocket. There’s no gain in spending power as alleged by the administration,” said Bill Dunkelberg, chief economist for the National Federation of Independent Business, the nation’s chief small-business lobby.

“If you run a pizza parlor of seven employees, your labor bill goes up by about $14,000. That has to come out of your pocket, or you pass it along to your customers,” Mr. Dunkelberg told me.

“The secretary of labor said this will mean a $5.5 billion total increase in pay that minimum wage workers will get over the next 12 months. I just wonder where small businesses are going to get $5.5 billion when so many are on the verge of going out of business. This is the worst time you could have a 10.7 percent wage increase,” he said.

When the National Small Business Association surveyed its members earlier this month, three-fourths said the economy had gotten worse. They also said that sales were down sharply — along with profits — and that they have had to lay workers off.

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