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Minimum wage pricing low-skilled people out of jobs, prof says

Business owners are adjusting to the new federal minimum wage increase that went into effect July 24. Covered non-exempt workers are entitled to a wage of not less than $6.55 per hour. Overtime pay at a rate not less than one-and-one-half times the regular rate of pay is required after 40 hours of work in a work week.

Not everyone is happy about the increase. University of Mississippi economics professor William F. Shughart doesn’t think it’s possible to find many economists who support minimum wage.

“I certainly don’t,” he said. “It increases the cost of business. To adjust, firms cut back workers’ time, reduce benefits and in some cases lay people off. It prices low-skilled people out of the workforce and it interferes with a free contract between employers and employees.”

Additionally, he says business owners can’t pass along all costs of the minimum wage increase to consumers. Therefore, employees’ work hours often are cut and younger workers get hurt by it. Even at minimum wage there are some benefits, such as free breakfast or lunch, uniforms and training opportunities, that may be cut to cover the wage increase.

Ripple effect

Raising the minimum wage is bad for small businesses because it affects everyone by raising costs, says Ron Aldridge, director of the state chapter of the National Federation of Independent Businesses (NFIB).

“Labor already accounts for between 70% and 80% of business costs,” he said. “Adjusting the bottom level of wages usually means having to adjust the entire wage scale. It creates a ripple effect of increasing wage earners who are already above the minimum wage to differentiate their level of expertise and training, thus causing further financial pressures on small business and the costs of consumer goods.”

Christy Sledge is hearing about the effects of the wage increase to business owners in Cleveland where she’s director of the Small Business Development Center at Delta State University.

“I’ve talked to a few local business people who’re saying they may have to cut back on some help and put others on a part-time basis,” she said. “For retailers, summer sales have been slow and this won’t help. A business owner in food service has gone up a little on prices to cover the increase.”

Even though the wage increase is part of a three-year plan to phase in new rates of pay, Sledge says some employers were still taken by surprise. “It comes at a time when they are already facing other increased costs and they’re looking for ways to cover them,” she said.

With part-time employees not covered by the law, Shughart thinks some employers will choose to put part of their workforce on part-time status. “The required wage increase will basically reduce the job opportunities for our workforce. It will really bite the retail and service sectors,” he said.

The federal minimum wage applies to all states. Some states have their own laws too. Because Mississippi does not have a state minimum wage law, the professor thinks the federal increase will have more of an impact here. Some states’ minimum wage is higher than the federal wage, as was the case in California, a state that recently rescinded its state law.

Small businesses suffer?

Aldridge sees a negative impact on small businesses. “Most of the national economy and job market have been propped up by the resilient power of small business, not big business,” he said. “However, with inflation pressures increasing for small business owners and families at their highest reported rate by the Labor Department since 1991, now is not the best time to be forcing employers to pay workers higher wages.”

He feels this second of three federal minimum wage hikes is part of an unfunded government mandate totaling a 40.7% increase over two years.

“Combine that with double-digit increases of health insurance costs, utility and fuel costs, transportation and shipping costs, raw material and product costs, food and other consumer goods, and you’ve placed many small businesses on the verge of a breaking point,” he said, “especially since many small businesses are family businesses fighting these multiple heavy increases cumulatively both at home and at their business.”

In a recent NFIB member ballot, 82% of those responding opposed increasing the minimum wage. “If faced with a minimum wage hike, the majority of NFIB members surveyed said they would cut hours, reduce their number of employees or replace low-skilled workers with higher-skilled workers,” Aldridge said.

Data of the U.S. Department of Labor indicates that 691,000 Mississippi workers were paid at hourly rates in 2007. Of that number, approximately 16,000 earned exactly the federal minimum wage and another 15,000 were paid below the minimum.

“Together, these approximate 31,000 Mississippi workers with wages at or below the current federal minimum wage made up only about 4.5% of all hourly-paid workers,” Aldridge said. “Nearly two-thirds of minimum wage workers move above that pay within one year. Most are entry-level jobs that are not lifelong dead end jobs. These jobs allow Mississippians to establish a track record of work and a work ethic that creates opportunities for better paying jobs.”

Shughart, the Barnard Distinguished Professor of Economics, says the minimum wage law is just politics that props up the lower end of unionized workers. “Labor unions have always pushed for minimum wage,” he said. “It’s vote buying by politicians. They could rescind it but I doubt they will.”

He expects pressure on business owners again next year when the third phase of the wage increase takes effect. “It will be the same story and coming at a bad time,” he said. “I don’t expect the economy to be better next year. It will take two or three years for the economy to work out, and in the meantime we will have weak growth.”

Contact MBJ contributing writer Lynn Lofton at llofton656@aol.com.

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