By Kris Maher
Wall Street Journal, 7/21/07

On Tuesday, about two million workers will get a raise, as the first increase in the federal minimum wage since 1997 takes effect.

But for all the handwringing about how raising the federal minimum wage would hurt employers and boost inflation, this week's initial wage increase to $5.85 an hour is expected to have little impact on the economy. The price of a cheese pizza might rise, but that could be blamed on higher dairy and gasoline prices, as well as higher pay for cooks and cashiers.

Generally, though, the effect on the economy will be small. Most states -- 30 and the District of Columbia -- already raised their minimum wage above the federal level and many big employers, including retailers such as Wal-Mart Stores Inc., or chains such as Starbucks Corp., frequently start workers off well above the federal minimum wage.

The increase will be felt more keenly in 20 states where the federal minimum wage of $5.15 an hour is currently in effect, and in sectors that rely heavily on minimum-wage workers, such as restaurants, hotels and retail. Groups such as the National Restaurant Association and some small businesses say job growth will slow and prices will rise. A higher minimum wage, combined with higher food costs, "will ultimately drive higher prices within the pizza category," says a spokeswoman for Domino's Pizza Inc.

Who gets a fatter paycheck? Last year, 2.6 million people earned less than $5.85 an hour, according to the Bureau of Labor Statistics. That includes a sizable chunk of workers who earn tips and others exempt from the minimum wage. People who earn the federal minimum wage tend to be young -- half were younger than 25 -- and three out of four workers earning $5.15 an hour or less last year worked in service jobs, mostly in food preparation. A bigger impact could be felt in states like Alabama, Arkansas and Oklahoma, which had a high percentage of workers at or below $5.15 an hour. The 70-cent-an-hour jump will be followed by an increase in each of the next two years, bringing the minimum wage to $7.25 in 2009.

While labor unions applaud the higher wage, some worker advocates are already warning that it will be difficult to enforce, especially for low-skilled workers, including immigrants who might be afraid to alert officials that they aren't being paid minimum wage.

Paul DeCamp, administrator of the Labor Department's Wage and Hour Division, says the division "has a very active enforcement program with respect to low-wage industries where minimum-wage violations are most likely to arise." The division retrieved $135.7 million in minimum-wage and overtime back wages for more than 222,000 employees last year.

Meanwhile, some small-business owners -- the group that is expected to be affected the most -- say raising the minimum wage is the right thing to do, even if it hurts their bottom line.

Helen Norman, co-owner of a Dairy Queen in Garnett, Kan., will have to give six young employees a raise, but she thinks the overall increase will help workers trying to raise a family.

"It probably will hurt some small businesses. It may hurt mine, too," says Ms. Norman. "But there's the other side of that story. Can people survive on that amount? I mean, I couldn't."

Write to Kris Maher at kris.maher@wsj.com

Copyright 2007 Wall Street Journal