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The Minimum Wage Battle

by on June 08, 2014 7:45 AM

The ongoing debate over the best ways to improve the financial health of the middle class and working poor has led to an increasing push to hike the minimum wage.

The federal minimum wage was first established at 25 cents during the Depression and since 1933 has risen to $7.25 per hour, which equates to $15,080 a year at 40 hours a week.

Pennsylvania currently has its minimum wage set at the federal minimum and 21 states have a higher minimum wage than Pennsylvania.

Washington has the highest state minimum wage of $9.32 but the city of Seattle just passed a laddered increase in its minimum wage that would take it to $15 per hour over the next seven years, which equates to $31,200 annually, assuming a 40 hour work week.

However, most minimum wage workers work less than a full-time schedule and many work several minimum wage jobs to make ends meet. The last increase in Pennsylvania's minimum wage was from $6.55 to 7.25 due to the federal minimum wage being increased in 2009.

According to the Pittsburgh Post-Gazette, of the 3.5 million Pennsylvania workers in 2013, only 190,800 (5.5%) earned minimum wage or below and 58% of those are under age 25.

What are both sides of the debate?

Considering it has been almost five years since the last Federal minimum wage increase, even with the low level of inflation in our economy, minimum wage workers are losing ground. WalMart and McDonald's workers have staged protests asking for a 'living wage' of $15 an hour. Liberals contend that raising the minimum wage would help struggling workers.

While many minimum wage employees are young people working their way through high school or college, President Obama's Council of Economics reveals that about half of those workers are part of families making less than $40,000 per year, which is at the bottom end of the middle class. A group of 600 economists signed a letter urging the president to increase of the federal minimum wage to $10.10.

Economists believe that raising the minimum wage will spur the economy by distributing more money to lower wage earners thus helping low and middle class families climb the economic ladder.

On the flip side, conservatives maintain that raising the minimum wage would cause businesses to make do with less and hire fewer workers, which would in turn hurt the very employees the raise is looking to assist.

Several academic papers (University of California and Employment Policies Institute) support this view and assert that raising the minimum wage "drove down GDP in low-skilled industries."

Many suggest that a better way to help the poor is to increase the earned-income tax credit. This would help minimum wage earners while not benefiting college students and the like.

It's possible that college students working their way through college while making a higher minimum wage would possibly benefit the entire economy by reducing student loan debt after graduation.

However, a new report on the quick-service restaurant (QSR) from Trinity Capital (a middle market business consultant) shows that the costs of an increase from $7.25 to $15 would raise expenses for an average QSR by $300,000 a year. This increase would lead to store closures, decreased employees or significantly higher prices.

I put myself in the business owner's shoes and considered what would happen to my business if I was suddenly required to pay my workers twice as much (similar to an owner needing to take workers from $7.25/hour to $15/hour). I would certainly have to make do with fewer workers and my business and clients would suffer. Doubling the minimum wage would be a huge expense increase for businesses such as small franchises and independent businesses in and around downtown State College.

The consensus is toward raising the minimum wage but to what extent is still up for grabs as is the end effect on small businesses and the economy.

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at jloy@nestlerode.com.
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