Cliff Slater's Second Opinion column from the

Honolulu Advertiser of August 9, 1999

     

 

 Minimum wage

minimizes jobs

 

The Governor now proposes to raise the minimum wage as a way to give working poor families more money. However, that simply shifts the welfare load from government to business. A minimum wage is simply a hidden unfunded mandate on employers who have to either pass the cost on to consumers or go out of business.

Before the Legislature considers a minimum wage hike, I believe they should ask themselves this, if $6.15 an hour is to be the new minimum wage, why not $15? That is preposterous, I think they will say, that would increase restaurant prices, for example, and result in consumers staying away. In turn, it would lead to people being laid off-$15 is too much.

That's right.

But the same holds true for any proposed minimum wage from $15 down to the current $5.25 and lower. In the lower ranges, the insidious effects of minimum wage legislation are just not so noticeable.

For small increases in the minimum wage, employers raise prices just a little and substitute machinery for employees. If a business cannot quite justify replacing a $5.25 an hour employee with a $50,000 machine but can at $6.15 then at the higher wage someone is going to be unemployed.

Employers will consider further reducing restaurant labor costs by relying more on prepared foods from offshore. For example, if it currently costs 5% less to prepare restaurant food here in Hawaii than offshore, what happens when labor costs go up 17%? More jobs are lost.

This logic is supported by a recent study by the Federal Reserve Bank, which concludes, "the net effect of minimum wages is an increase in the proportion of poor families." (1) A study published in the Journal of Economic Literature on the views of the nation's economists shows they also concur with this view. (2)

A minimum wage hike raises the height of the lowest rung on the wage ladder and makes the least employable among us-those with little English, illiterate and without work skills-unemployable.

If the Governor believes this issue too important to ignore then he should reorder his spending priorities. Instead of raising the minimum wage, let the Governor propose he is going treat minimum wage for what it is-welfare.

For example, within the existing budget he could arrange that the state subsidize half the difference between actual hourly pay and, say, $7 an hour for married heads of households. If someone is worth (and is paid) only $5 an hour, the taxpayers could supplement this with half the $2 difference, or $1; those earning $6 would get a 50 supplement.

This proposal ensures that the right incentives remain in place for both employer and employee. Most importantly, by replacing the lower rungs of the wage ladder, it would lead to the creation of more jobs.

While he is at it, the Governor could propose that we stop taxing minimum wage earners. They pay a greater proportion of their incomes in the 4% General Excise Tax than others and on top of that they pay income tax.

Legislators must look beyond their good intentions and study what actually happens as a result of their actions. Quite often, the outcome of legislation is the opposite of that intended. Minimum wage legislation is a good example.

Footnotes:

(1) Neumark, David, Mark Schweitzer, and William Wascher. Will Increasing the Minimum Wage Help the Poor. Federal Reserve Bank of Cleveland. February 1, 1999. Available at: <http://www.clev.frb.org/Research/com99/0201.pdf>

(2) Fuchs, Victor R., Alan B. Krueger, and James M. Poterba. Economists' Views About Parameters, Values, and Policies: Survey Results in Labor and Public Economics. Journal of Economic Literature, vol. 36, no. 3 (September 1998), pp. 1387-1425.