The Economic Impact of Minimum Wage Hikes

Congressional Democrats have promised an increase in the minimum wage should they take power, and six states have voter initiatives to increase the minimum wage on the ballot Tuesday. This Wall Street Journal story has an analysis of the likely economic effects of such wage increases. Examining the case of Oregon's 2002 law, which mandated automatic annual minimum wage increases, the article suggests that the most negative predicted consequences of the law have not come to pass, and that the state's unemployment rate has fallen from 7.6% in 2002 to 5.4% today. That's not to say there's been no economic dislocation in the Oregon business sector:

Some employers are being squeezed, for sure, and their experiences will become ammunition for those who will fight any increase in the federal minimum wage. Agriculture is pinched because sellers can't raise prices, set on global markets, when labor costs go up. Some businesses say they have avoided expanding in Oregon because labor costs have risen, the sort of change in behavior at the margin that foes of a minimum wage worry about.

At Petite Provence eatery in Portland, co-owner Didier Blanc says the minimum wage, while paid only to servers, has had an "aftershock effect," forcing him to raise wages for all employees. While servers earn the minimum, bakers and cooks earn between $9 and $12 an hour. The costs are passed on to customers.

"After it goes up, everybody at $9 an hour and above will want some kind of raise," says Mr. Blanc. "We have to pass it on in our prices because it goes straight to our bottom line."

So far, though, customers have been willing to pay. Mr. Blanc and his partner have two successful shops and are talking of opening a third. "I don't worry about it," he says of the higher wages, "because if I have to raise prices, next door will have to do the same thing, too."

Chris Dussin, owner of Old Spaghetti Factory, a Portland-based chain with 38 restaurants in 16 states, sees it differently. "You can only raise prices so much before you're going to chase the customer away," he says. Costs at his three Oregon restaurants have gone up $300,000 since the minimum-wage increase -- more than revenues. Mr. Dussin says his bottom line "is eroding" and his profit margin has fallen to 2% or 3%. He raised prices on some items, cut the number of hostesses and has increased the number of tables for each server.

"It's important to take care of people in minimum-wage jobs, but what's missed is the impact on the economy and job creation," he says. "It's not feasible to hire 10 people, so I'm just going to hire seven." He says labor costs scotched plans to open a restaurant in Bend, Ore., a tourist hotspot. The next Old Spaghetti Factory will be in Boise, Idaho, which has a minimum wage of $5.15 and -- unlike Oregon -- allows employers to pay less to workers who collect tips.

Read the whole thing. The article looks at the academic research debate on whether an increase in the minimum wage leads to a reduction in hiring among employers. The piece also cites additional perspectives on Oregon's 2002 law. Especially interesting is the article's mention of the type of folks making a living at base wage levels, with some workers complaining that the state's $7.50 an hour minimum is barely enough to survive.

It's hard for me to sympathize. I worked minimum wage jobs while I was in high school, and for a time in college at Fresno State I pumped gas for the minimum wage as well. I realized early on that I was never going to able to support a middle class family lifestyle making $4.25 an hour (the minimum back in 1989, when I started at Fresno State). The minimum wage provides an entry level pay structure for younger, upwardly mobile individuals -- it's not designed as a living wage generous enough to support a family, despite what "living wage" advocates say.