Minimum Wage Should Not Be Living Wage

by Lowell L. Kalapa, Tax Foundation of Hawaii

A few politicians are a bit bent out of shape because this year’s session of the legislature did not approve an increase in the minimum wage which is perhaps a confirmation of what many have known for a long time, that is that those critics probably never held a real job or never ran their own business.

While the call for a higher minimum wage may be politically popular with those who are earning the minimum wage as it sounds like a built in pay increase, it ignores the domino effect it would have on the cost of living. As wages rise, so will the cost of goods and services in order for employers to be able to pay that higher minimum wage.

Politicians argue that earning the minimum wage puts those workers earning the bare minimum at poverty level and it certainly is not a “living wage” that can support a family. The problem with that observation is that the minimum wage was never intended to be a “living wage” on which one could support oneself let alone a family. The minimum wage is what an employer must pay any employee. Paying anything less would be in violation of the law and the business owner could be fined or even jailed. The minimum wage was meant to be an “entry level” wage, that is a minimum wage allows an employer to hire and pay a lower wage to someone who has no job skills, let alone any experience in holding down a job.

Surprising as it may seem, there are many folks who don’t even have some of the basic skills for holding down a job such as arriving at one’s job on time or putting on shoes and socks or dressing appropriately for the job. While one would assume that most of the minimum wage earners are inexperienced high school or college students who have never worked a day in their life, it is also no surprise that there are adults with little or no job skills who are earning the minimum wage. Thus, it is not uncommon to find an employer more than willing to hire a retiree to fill some simple jobs like those at a fast food restaurant as the employer can depend on that seasoned retiree to at least show up to work on time and to be able to take directions and execute their duties efficiently.

And lest politicians believe that it is just another dollar or two if and when the minimum wage increase is adopted, they need to think again. There are a number of mandatory benefits the employer must pay that are based on the amount of wages paid for that employee. The two largest coverages based on the employees’ wages are unemployment insurance and workers’ compensation insurance. As compensation increases, so do the premiums for these mandatory insurances. So it is not just the $9.25 that will increase the cost per employee, but also the fact that these insurance premiums will increase as well.

Again, we all need to remember when we started on our career pathway as high school students looking for our first summer job. What was that question that we kept on getting from a prospective employer, “So what kind of work experience do you have?” The other question was something like, “What sort of job skills do you have?” And probably the most practical job skill that high school students may have possessed at that point was “typing,” now known as keyboarding.

Having no previous job experience and with only typing as a usable job skill, the employer took a gamble on us high school students because we could be paid the minimum wage. With the higher minimum wage that is being proposed, employers will think twice about whom they hire and how much they will pay for an unskilled worker. Again, the minimum wage was never meant to be a “living wage.” It was always meant to be an entry level pay rate.

With a higher minimum wage, businesses will see what is called Awage compression.@ This is where workers at or just above the new minimum wage level will suddenly demand that they be paid more because the unskilled worker is making nearly as much as the skilled worker. Thus, there will be pressure to bump up the pay of the skilled worker so that the “reward” is greater than what the minimum wage earner is getting.

Given how fragile the state’s economy is and being dependent on the fickleness of the visitor industry, a major increase in the minimum wage in a relatively short period could doom businesses in Hawaii, especially small businesses and increase the cost for those that can survive with the higher minimum wage. Sure, it may be popular with those employees being paid the minimum wage, but then again how will that higher minimum wage being proposed preclude unskilled workers from ever entering the workforce?

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