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Minimum Wage Hike will Worsen Corona Virus Recession
By Grassroot Institute @ 11:59 PM :: 858 Views :: Economy, Labor, Small Business, Tourism

Testimony on proposed minimum-wage increase

From Grassroot Institute of Hawaii, Mar 12, 2020

Grassroot Institute of Hawaii – HB2541 Testimony

To: Senate Committee on Labor, Culture and the Arts

Sen. Brian T. Taniguchi, Chair

Sen. Les Ihara, Jr., Vice Chair

From: Grassroot Institute of Hawaii

Joe Kent, Executive vice president

Re: HB2541 — RELATING TO HELPING WORKING FAMILIES

Comments Only

Dear Chair and Committee members:

The Grassroot Institute of Hawaii would like to offer its comments on the portion of HB2541 which proposes increasing Hawaii’s mandatory minimum wage to $13 an hour by 2024.

The Grassroot Institute of Hawaii is concerned about the possible effect of this legislation on Hawaii’s economy, especially in light of the possible economic downturn that is expected to follow in the wake of the COVID-19 epidemic.

This week, the Economic Research Organization at the University of Hawaii predicted that the coronavirus scare would lead to a drop in tourism, the possible loss of 6,000 jobs, and a protracted recovery period.[1]

The UHERO report stressed that it is not yet possible to accurately predict the long-term effect of the virus on the state’s economy. However, that uncertainty emphasizes the need for the Legislature to act with caution in the coming months. It is especially important to avoid actions that could lead to a rise in unemployment or hikes in the cost of living.

Unfortunately, there is evidence to indicate that this bill, if enacted, would fail in its intent to help lift the state’s working families out of poverty. Recent years have seen a glut of research demonstrating that far from helping low-wage employees, minimum wage hikes are more likely to increase their economic burden as businesses cut hours, turn to technology or even cut jobs in order to mitigate the higher costs.

In August 2018, a University of Washington study found that increasing Seattle’s minimum wage from $11 to $13 an hour resulted in both the loss of about 5,000 jobs and an average cut in pay for the remaining employees of about $125 a month, thanks to a cut in their job hours of more than 9%.[2]

Proponents of a minimum-wage hike often point to a few highly limited surveys that suggest raising the minimum wage can be economically neutral, but the vast majority of research shows the opposite is true. Study after study shows that when a municipality drastically raises its legal minimum wage, low-wage employees suffer.

In 2010, researchers from the National Bureau of Economic Research and the Federal Reserve Board compiled the results of 53 scholarly studies into a book, “Minimum Wages,” and concluded there is “no compelling evidence that minimum wages on net help poor or low-income families, and some evidence that minimum wages adversely affect these families, and increase poverty.”[3]

Examining the idea that higher minimum wages will reduce poverty, those same researchers found that the opposite was true. While some low-wage workers do make more money, the gains are offset by loss of employment or hours for other workers. The researchers found that a minimum-wage hike increases the proportion of poor families by simply redistributing wealth among low-income earners.[4]

Because the number of families that fall into poverty from a minimum-wage increase slightly outstrips the number of families that escape poverty from the minimum-wage increase, the state is likely to see a slight increase in the number of families living in poverty following a minimum-wage hike. This is a further demonstration of why minimum-wage hikes are the wrong tool to address poverty.

The minimum-wage debate is often framed as a fight between businesses and employees. In truth, raising the legal minimum wage can hurt both. Employment declines as businesses find ways to cope with the increased cost. Some stop hiring, some turn to automation, and some demand more work from the employees that stay.

For businesses that already have to contend with low margins and high risks, even a moderate increase in the minimum wage can be sufficient to drive them out of business.

In 2017, Dara Lee Luca of Mathematica Policy Research and Michael Luca of Harvard Business School looked at restaurant closings in San Francisco after the minimum wage was raised to $13 an hour. The pair found that the higher minimum wage led to the death of many mid-range restaurants, as well as fewer new restaurant openings. For every dollar that the San Francisco minimum wage went up, there was a 4 to 10% increase in the likelihood of restaurant closings.[5]

The Grassroot Institute of Hawaii prefers policies that would strengthen our state’s economy and benefit both businesses and employees. This bill, however, may have a negative effect on employment in general. Not only would companies in Hawaii be forced to lay off workers or cut hours or benefits in order to afford increased wages, they also likely would slow or even stop new hiring. Moreover, the lack of a tip-credit provision puts an additional burden on restaurants, which already operate with thin margins.

If we want to establish our state as a desirable place to do business, we cannot continue to treat company profits as an endless funding source for the state’s social initiatives. It is not fair to assume that Hawaii’s employers are intentionally underpaying their employees or to assume that the government is more capable of addressing the payroll limitations of a business than the business owner is.

In order to help Hawaii’s workers make more money, the state should pursue policies that will make the state more prosperous as a whole. A combination of tax relief and a reduction in the obstacles that the state places in the way of business and entrepreneurship is the best way to move forward, to improve both our economy and the situation of low-wage workers — not a minimum wage bill that would more likely hurt than help Hawaii’s businesses and low-income working families.

Thank you for the opportunity to submit our testimony.

Sincerely,

Joe Kent

Executive vice president

Grassroot Institute of Hawaii

[1] Byron Gangnes, et al., “Interim Forecast Update: COVID-19 Will Impose Significant Economic Impacts in Hawaii,” UHERO Blog, March 10, 2020, https://uhero.hawaii.edu/interim-forecast-update:-covid-19-will-impose-significant-economic-impacts-in-hawaii.

[2] Ekaterina Jardim, et al., “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle,” NBER Working Paper 23532, National Bureau of Economic Research, Cambridge, Mass., May 2018, https://www.nber.org/papers/w23532.

[3] David Neumark and William L. Wascher, “Minimum Wages,” The MIT Press, Cambridge, Mass., August 2010, https://mitpress.mit.edu/books/minimum-wages.

[4] David Neumark and Wiliam Wascher, “Do Minimum Wages Fight Poverty?” NBER Working Paper Series, Working Paper 6217, National Bureau of Economic Research, Cambridge, Mass., August 1997, https://www.nber.org/papers/w6127.pdf.

[5] Dara Lee Luca and Michael Luca, “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit,” Harvard Business School NOM Unit Working Paper No. 17-088, April 2017 (revised August 2018), https://www.hbs.edu/faculty/Pages/item.aspx?num=52552.

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