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Obama's minimum wage pledge divides economists

Contracted service workers protest against low wages in Los Angeles, California on June 15, 2011
Security officers, airport workers and other contracted service workers march to protest against “low wages and benefits” in Los Angeles, California on June 15, 2011. President Barack Obama's pledge to raise the minimum wage by 24% has divided economists

President Barack Obama's pledge to raise the minimum wage by 24 percent has divided economists and businesses who warn it could threaten recent improvements in jobless numbers.

Obama has stated that his administration plans to increase the existing minimum hourly rate from $7.25 to $9, vowing to press ahead with the initiative despite the sequester budget crisis.

"There are other areas where we can still make progress even with the sequester unresolved," Obama said, referring to $85 billion of drastic budget cuts that went into effect on March 1.

"I'm gonna keep pushing to make sure that we raise the minimum wage so that it is one American families can live on."

Unlike other developed nations such as France, where the minimum wage is indexed to inflation and adjusted automatically each year, the rate in the United States often remains unchanged for years at a time.

People line up outside a job fair on September 17, 2009 in Baltimore, Maryland
People line up outside an employment guide job fair on September 17, 2009 in Baltimore, Maryland., USA.

The last increase, to the current level of $7.25 an hour, was introduced nearly four years ago in July 2009.

"Taking action on the minimum wage is long overdue," US Deputy Labor Secretary Seth Harris told AFP.

The United States has one of the lowest minimum wages of major industrial nations.

According to figures from the International Labor Organization, the US is only 38 percent of the median wage, compared with 46 percent in Britain and 60 percent in France.

For Democratic lawmakers, Obama's proposals do not go far enough. Democrats in Congress have launched a bill hoping to raise the rate to $10.10.

Democratic House Minority Leader Nancy Pelosi said the increase -- strongly opposed by Republicans -- was necessary to protect middle class Americans.

"We have a situation where if we are to honor our commitment to the middle class, which is the backbone of our democracy, we have to reflect that in... our public policy," Pelosi said.

Proposals to increase the minimum wage are broadly popular, with 71 percent of people backing the move, according to a Gallup poll.

A homeless person rests on a bench in downtown Washington, DC, on February 21, 2013
A homeless person rests on a bench in downtown Washington, DC, on February 21, 2013.

Former Obama administration adviser William Spriggs, the chief economist of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), said the hike was essential.

"The gap between the average wage of the American worker and the minimum wage is very high," Spriggs said.

He said the current minimum wage also exposed a gender divide in the workforce, noting that those on the minimum wage were predominantly women.

"We think it would also help close the gender gap between men and women in terms of salary," he said.

But other economists and business groups are sharply divided over the proposals.

The US Chamber of Commerce has argued the burden of any increase will be felt most by small businesses.

"The US Chamber continues to believe that increases in the minimum wage fall disproportionately on small businesses who are the least able to absorb such a dramatic increase in their labor costs," it said.

"Accordingly, the US Chamber continues to oppose increases in the minimum wage and believes that any increase must be coupled with provisions that recognize the impact this will have on small businesses."

Michael Saltsman, research director at the conservative Employment Policies Institute, questioned whether a wage increase could be effective.

"Will it do what President Obama wants to do, which is help to reduce poverty?" Saltsman asked. "On that question, the minimum wage has been a disappointment too," he said, adding that poor people "need a job, not a wage increase."

Any increase in the minimum wage is likely to be mitigated by the complexity of the American system. Many states already have their own minimum wage, with several already above the current level of $7.25, while certain employees, such as those paid tips, work under a different scale.

But Ioana Marinescu, an economist at the University of Chicago Harris School of Public Policy Studies was adamant that an increased minimum wage will "boost consumption" without adversely affecting businesses.

"Underpaid employees will often eventually find a better paid job elsewhere," she said.

"By paying more, employees are more likely to stay, which will mean businesses are saving money spent recruiting and training new employees."

Obama's minimum wage push has also found support from an unexpected quarter, with the budget retail giant Costco backing the move.

"Instead of minimizing wages, we know it's a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty," Costco chief chief executive Craig Jelinek said.

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