Four Things You Should Know About The Minimum Wage Debate In Hawaii

by Paul Harleman, Senate Minority Budget Analyst, February 14, 2014

Spurred by President Obama’s State of the Union address, the Hawaii State Legislature is taking another look at the minimum wage debate. Both the State House and Senate have introduced legislation (SB2609 and HB1623) that would not only increase the current minimum wage of $7.25 to $10.10, but would also link the future minimum wage to inflation. As the cost of living and poverty rate increase dramatically, a push for a minimum wage increase is often seen as a viable solution to address the rising level of social and economic inequality in Hawaii. Because of the “populist” nature of the debate, facts and empirical evidence are often overlooked. Consider four key points that are not adequately addressed by the legislature and media.

1.     Raising the minimum wage will benefit fewer than 2% of low-income working families.

Proponents argue that the minimum wage increase is needed to help the working poor, whose purchasing power has largely diminished over the last decade. Despite the noble intention of the Hawaii legislature, careful examination should be given to the true impact that a proposed raise would have on the working poor.

According to the state’s Department of Labor and Industrial Relations, (Testimony: SB2609, January 30th, 2013) a total of 14,303 individuals earned $7.25 or less in 2012. If this statistic is adjusted for teenage and part-time employment, the total number of individuals who are working full-time and who are most likely supporting a family amounts to 3,700.

According to the United States Census Bureau Supplemental Poverty Measurement statistics, 231,000 Hawaii families lived in poverty in 2012. So although the intent of the proposed minimum wage raise is to help the working poor, the facts indicate that the proposal would benefit fewer than 2% of low-income working families.

2.     Raising the minimum wage increases the costs of low-skilled labor by 39%.

Leading economists agree that historically, government mandates to increase the minimum wage have increased the cost of low-skilled labor without any improvements in productivity. Currently, Hawaii employers pay a total of 12 percent in payroll taxes, which include taxes for social security, Medicare, as well as federal and state unemployment contributions. This means that a $1 increase in the minimum wage actually increases the cost of minimum-wage labor for employers by $1.12. Under the current proposal, the minimum wage will increase from $7.25 to $10.10 over a three-year period. Translation:  the annual full-time costs for low-skilled labor (40 hour workweek) will increase by $6,642, which represents a 39% increase. With such a large increase, it remains to be seen how these employers will respond.

According to economic theory, large increases in the cost of labor without offsetting increases in productivity could lead to either higher prices of goods and services or reduced employment. In Hawaii, since minimum-wage workers represent such a small proportion of the labor force, it is reasonable to assume that the adverse economic effects of the minimum wage raise will be limited to specific businesses and industries.

3.     Raising the minimum wage will not lift working families out of poverty.

No empirical evidence in contemporary economic literature suggests that a minimum wage increase will reduce poverty. Multiple studies during the last decade have generally concluded that past minimum wage increases had no effect on poverty. As a public policy strategy, a minimum wage increase could prove successful in improving living standards of low-income working families only if a larger proportion of the minimum-wage earners are members of low-income households. However, since less than 25% of minimum-wage earners are estimated to be heads of households, a minimum wage increase will provide no more than symbolic support to low-income working families.

Over the last decade, the number of people in poverty in Hawaii has increased from 162,142 in 2000 to 231,000 in 2012, according to the Census Bureau’s Supplemental Poverty Measure. The biggest contributor to this increase is the relatively high cost of living in Hawaii. On average, Hawaii residents pay a greater proportion of their household income on food and rent in comparison to mainland residents. During the same decade, rising costs for food and rent have effectively reduced the purchasing power of all households in Hawaii. Clearly, minimum-wage workers are more affected by their reduced purchasing power. Hawaii has a broader policy problem that is beyond the narrow scope of the current minimum wage debate.  If the legislature is serious about fighting poverty in Hawaii, a broader and more comprehensive discussion is essential. Such a discussion should include a thorough review of the state’s failed housing and development policies, the economic effects of the Jones Act, as well as an analysis of Hawaii’s regressive tax structure.

4.     Raising the minimum wage is expected to reduce teenage employment.

Another overlooked, but important factor is the lack of discussion of the adverse employment effects that a minimum wage raise could have on teenage employment. There is a broad consensus among economic empirical studies that minimum wage raises lead to reduced teenage employment. The estimates indicate that for each 10 percent increase in the minimum wage, teen employment is expected to be reduced by 1 to 3 percent. The current proposal increases the minimum wage by 39 percent over a three-year period. This means that employment among teenage workers is expected to be reduced by 8 percent. This will have an adverse effect on the estimated 1,900 teenagers with minimum-wage jobs. To account for the adverse employment effects for teenagers, the legislature should consider a reduced minimum-wage requirement for teenagers. For example, in the European Union, multiple countries have minimum-wage laws that differ by age. As part of these laws, the minimum wage for workers who are below 18 years old are limited to rates varying from 60 to 80 percent of the prevailing minimum-wage requirement.

Conclusion

Although the proposed minimum wage increase is seen as viable solution to poverty and inequality, the evidence indicates otherwise. An increase in the minimum wage would benefit a handful of low-income working families at the expense of teenage workers and small business owners. In reality, the one thing that the minimum wage proposal does accomplish is to effectively divert the political narrative away from the real causes of poverty and inequality in Hawaii.