Minimum Wage Hike Kicks in Today

A new federal minimum wage will go into effect Tuesday, the first in a series of wage increases heralded by some low-income advocates but criticized by business leaders as a potential financial blow.

The minimum wage that takes effect today will boost pay for covered, non-exempt employees to $5.85 an hour from $5.15. The next jump will occur on July 24, 2008, to $6.55 an hour, and then to $7.25 an hour effective July 24, 2009.

The last wage increase was a two-step increase in 1996 and 1997.

"The first step is incredibly modest, a 70-cent increase," says Liana Fox, an economic analyst at the Economic Policy Institute (EPI), a non-profit think tank that receives some funding from labor groups. "But by the third wage increase, 12.5 million workers will see wages go up. People see this as the right, moral thing to do."

Already, 30 states and the District of Columbia have minimum wages higher than the federal, so only 20 states will be affected by the first wage increase today. More than 70% of workers live in states where state minimum wages already trump the new federal wage increase, according to EPI.

In cases where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.

Marc Freedman, director of labor law policy at the U.S. Chamber of Commerce, says the higher federal minimum wage could mean fewer hours for employees, fewer pay increases for other employees, benefits reductions, job losses and waning job creation.

"In particular, in the small-business sector where companies have restricted cash flow, any time you have to arbitrarily increase labor costs, they have to cover the costs in some ways," Freedman says. "They have to pay more and get nothing out of it."

Erik Kaiser, owner of Atlanta-based Grand Central Pizza, doesn't expect to see a huge financial impact because he already pays a starting rate of about $6.50 an hour. But he says he may be less likely to hire entry-level applicants once the minimum wage reaches $7.25.

"It will have limited impact on me," Kaiser says. "It's probably within the realm of inflation. I thought the minimum wage should go up every year according to the cost of living. I don't think it's going to be a big deal."

Catherine Fox-Simpson, a Dallas-based tax partner specializing in the retail industry, says businesses will be affected, but many have already anticipated increased costs. She says retailers may see some of the biggest impact.

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