Just a Vicious Circle, Higher Minimum Wage, Higher Prices

by Lowell L. Kalapa, Tax Foundation of Hawaii

Now that both the state administration and the President have come forward calling for an increase in the minimum wage, it would be well worth it to stop and look at the issue from an economic and financial well-being stand point instead of the emotional and social welfare perspective.

The very idea of raising the minimum wage, whether it be at the state or federal level, has a lot of political appeal as most people believe they should be earning more than what they are earning currently. It is all about ego and self-esteem that we are all worth more than what we are currently being paid. So let’s get that out of the way.

Let’s also get rid of the erroneous belief that most of the work force is earning the minimum wage. That is just not true. On the whole, the majority of Americans - that is of those who are still employed - are making more than minimum wage, be it because of their longevity in their careers or because of their occupation. So who are the people of whom the President speaks who are earning the minimum wage that puts them below the federal poverty line? Those who make the minimum wage are largely the unskilled labor force, including youth who are working part-time jobs after schools or during the summer and spring and winter breaks.

Minimum wage earners are just that, people in the labor force who have no advanced skills other than to show up and do tasks as directed. This is not to demean those workers, but this to clarify that the minimum wage is paid as a floor that is required of employers for every and any employee regardless of the level of competency or skill set that the employee may possess. So in that respect, the minimum wage may be considered compensation of “entry level” workers. Is that good or bad? That, of course, will depend on your perspective.

From the workers’ point of view - and perhaps it is the perspective of the President - there is no way that a person could survive based solely on compensation that it paid at the minimum wage. But then again, the minimum wage was never considered to be a “living wage,” but rather an entry level pay scale. It allowed workers who had no experience to be employed and to gain that important characteristic called “experience” - something that all employers seem to want to see if they are out shopping around for potential employees. How many of us remember going from door to door hunting for our first job only to be turned away because we had no “experience?” Many can remember the frustration they encountered as they were turned away because of their lack of experience.

But that is where the “minimum wage” provided the opportunity for many a young worker to get in the door on the promise to work hard and a willingness to do the job that gave many a budding worker the experience needed for a better paying job. A truly bare “minimum wage” of a dollar and ten cents or a dollar and a quarter an hour allowed employers to hire many more unskilled workers so that at least they could try their hand at a position for which they could claim work experience.

So if the minimum wage rises to $8.75 or $9.00 per hour, where will employers get the money to afford that entry level worker? Sure the employer could raise the cost of the goods and services sold by the business and if all businesses take that strategy the overall cost of living and working in this state will get all that more expensive. So, will that single mom that the President wants to help be better off with the higher minimum wage if the cost of groceries goes up?

Policymakers also need to remember that many of the mandatory benefits and premiums associated with an employee are based on the amount of compensation received by the employee. These include the cost of Social Security and Medicare premiums including that paid by the employer, unemployment compensation insurance and worker’s compensation. As wages rise, so do the premiums for these coverages as they are all based on the employee’s wages.

Of course, organized labor would love to see an increase in the minimum wage as the minimum wage sets the floor of the amount paid unskilled labor. A higher minimum wage contributes to what is known as wage or salary compression, pushing the floor higher and bumping up against what is paid for skilled labor.

So is there a way to address the challenge of providing a “living wage” as the President argues? Next week we will look at some alternatives to this problem.

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