TAKING “MINIMUM WAGE” OUT OF CONTEXT

by Lowell L. Kalapa, Tax Foundation of Hawaii

As we approach another session of the legislature and with Congress about to go on a holiday break, there will be renewed rhetoric about raising the minimum wage. There is obvious ignorance demonstrated when the minimum wage is characterized as a “living wage.”

Proponents of increasing the minimum wage decry the fact that the minimum wage is insufficient to make ends meet for a single mom who has to work to support her children. What those proponents seem to forget is that the minimum wage was adopted as the lowest possible wage that could be paid to a worker and is usually extended to those who join the workforce with no job skills AT ALL. We are talking about, for example, a high school student searching for a summer job who has no work skills, be it understanding that they need to be at their place of employment before the shift begins or that dressing appropriately is a requirement to hold that job, be it wearing shoes instead of slippers or with hair well groomed if the job requires serving a customer in a restaurant or in a retail store.

The minimum wage was never meant to be this “living wage” that everyone from the President on down to local legislative leaders would like people to believe. While a modest increase in the minimum wage would recognize that costs have been exacerbated by the effects of inflation, the call for an increase in the minimum wage by nearly $2.00 an hour will have far reaching effects that will be self-defeating in the drive to provide enough income to “make ends meet.”

First of all, one of the simplest questions is “where will the money come from” to pay the higher minimum wage? The most obvious answer is that employers will have to raise the costs of the goods and services they make and sell. That means the cost of the higher minimum wage will have to be recovered in a can of corn or in that loaf of bread. With a substantial hike in the minimum wage, employers will probably not only have to increase the price of the goods and services they sell, they may also have to reduce the number of people who are paid that minimum wage.

So the economic impact resulting from a big jump in the minimum wage is that the cost of living will rise at one end and at the other end, workers will either lose their jobs or they will see their hours shortened. Thus, such a hike is self-defeating as the higher minimum wage worker will probably see a commensurate rise in the cost of everything from groceries to shoes and/or they may actually find themselves out of work or working less hours. Both not a good thing from an economic point of view as the higher wages and, therefore, higher prices will accelerate the inflation rate while reducing the number of employment opportunities. So much for prosperity for the nation’s workforce - be it the consumer or the worker.

Given the fact that the nation’s economy is no longer insular but must compete on the world marketplace, rapidly increasing wages will, no doubt, make goods and services sold to our trading partners that much less price competitive. While political leaders decry the loss of jobs to overseas markets, do they realize a substantial increase in the nation’s minimum wage will insure that those jobs that were outsourced overseas will probably stay there?

What political leaders need to realize is that the minimum wage was meant to be a wage that employers are required to pay an employee even if that employee has no skills. Most employers realize that once trained, that skilled employee is a valuable asset who can be retained as long as those skills are rewarded with increased compensation and benefits.

Politicians who cite employees who are earning the minimum wage in a job that the employee has held for several years seem to overlook the obvious question. That is, if that employee is still earning the minimum wage after holding the same job for a number of years, has the employee made no effort to improve or acquire better job skills? A higher pay rate is the incentive for an employee to improve productivity with better job skills. On the other side, for the unskilled, first-time job applicant, those potential job opportunities will shrink as employers become more discerning about who they hire, taking less risk on hiring unskilled workers, weighing the additional cost of the higher minimum wage against the cost of training that unskilled worker.

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