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$7.25 An Hour: Is It All Good News?

This summer's minimum-wage hike means more money in the pockets of working teens. But is there a downside?

By Patricia Smith

Sixteen-year-old Steve Wayne, who worked this summer as a lifeguard and swim teacher in Idaho Falls, was thrilled to see an extra $20 in his paycheck when the federal minimum wage increased in July.

"When you're getting paid minimum wage, anything helps," Wayne told the Idaho Falls Post Register. He's one of several hundred thousand American teens who earn the minimum wage.

The last of three recent increases that took the minimum from $5.15 an hour in 2007 to $7.25, the 70-cents-an-hour hike means a teen working 15 hours a week at minimum wage is taking home an extra $10.50 a week.

While the increase puts more money in people's pockets, there are questions about the overall effect on workers who earn the minimum wage—most importantly, whether raising the rate makes it harder to find and keep their jobs.

About 2.8 million workers, many of them young, were directly affected by the increase. (Thirteen states have minimums higher than the federal rate.) About half of those earning minimum wage are under 25 years old. About 70 percent work in service occupations, mostly food preparation, and about two thirds are women.

U.S. Secretary of Labor Hilda Solis says the minimum-wage increase will pump an extra $5.5 billion into the economy over the next year, which is helpful at a time when the economy is hurting.

"You're giving people who spend money a raise," says Kai Filion of the Economic Policy Institute. "Those people will go out and spend that money, and it will circulate through the economy."

But other economists say raising the minimum wage actually hurts the very people it's designed to help. A higher hourly minimum, they say, could force businesses to cut workers' hours, or even lay people off.

"What matters for people earning minimum wage is how much money they take home, in total, in their paycheck," explains Rajeev Dhawan of Georgia State University's Economic Forecasting Center. "Their hourly rate may go up, but their number of hours may come down, so it's not an overall increase."

Business owners also say that raising the minimum wage exerts upward pressure on other wages. "If the minimum wage is $7 and I have to pay $8 or $9 to hire a dishwasher, then the cooks are going to say they want more," says Cleveland restaurant owner Rick Cassara. "How much can I charge for that hamburger?"

Another argument against a higher minimum is that it makes it more expensive for businesses to hire new workers. That's a real problem in the midst of what some are calling the Great Recession. The unemployment rate, now about 10 percent, is higher than it's been in decades, and in August, the teen unemployment rate hit a record 25 percent.

University of California professor David Neumark estimates that this summer's minimum-wage hike will wind up costing some 300,000 jobs for workers ages 16 to 24. For many businesses already struggling to make ends meet in these tough times, it will be simply too expensive to keep them or hire them in the first place.

New Deal Roots

The first federal minimum wage㬕 cents an hour—was passed in 1938 in the midst of the Great Depression. It was part of the New Deal's Fair Labor Standards Act, which also established overtime pay and banned child labor. President Franklin D. Roosevelt said that other than Social Security, the law was "the most far-sighted program for the benefit of workers ever adopted."

Seventy years later, one of President Obama's campaign promises was to raise the minimum wage to $9.50 an hour by 2011, and from there, adjust it annually for inflation.

Advocates of a higher minimum wage point out that increases haven't kept up with inflation, so today's minimum actually buys much less than it used to㬍 percent less, in fact, than its adjusted-for-inflation peak in 1968.

"The minimum wage has been completely disconnected from what people need to live on," says Holly Sklar of Let Justice Roll, a group that is trying to re-establish that connection by raising the minimum wage to $10 an hour—what they call a "living wage."

Economists who oppose increases often say most minimum-wage workers aren't the primary breadwinners in their families. But Sklar says just because so many are teens doesn't mean they're working just to have spending money for the mall.

"Nowadays, many of the teenagers who are working minimum-wage jobs are doing it because they are trying to save money to go to college," she says, "or because their families don't make enough money, so they're contributing."