Keep The Promise for Better Wages as Goal

by Lowell L. Kalapa, Tax Foundation of Hawaii

Last week’s commentary set off a string of responses largely from small business owners who are concerned that they will have to reduce the number of positions in order to accommodate a higher minimum wage.

Some of those businesses also report that they utilize part-time workers in order to avoid having to provide employee benefits required for full-time employees. Still others report that they already pay more than the minimum wage for those employees who have the skills or the work ethic that make them great employees. What most of these businesses fear with a rise in the minimum wage is wage or salary compression, that is, where a rise in the legally required minimum wage pushes up against what these employers are paying experienced employees. These employees will look at their colleagues who are earning the minimum wage and say they should be paid more because the unskilled or inexperienced worker is getting paid more. This puts a lot of pressure on payroll costs especially for companies where the operating profit can be very thin like grocery stores and restaurants.

If the minimum wage does rise, where do our elected officials think businesses will get the money to pay the higher wages? Advocates point out that some 21 states already pay more than the federal minimum wage. What they fail to note is that most of those states have large thriving industries like Washington State which is home to Boeing, Amazon and Microsoft, just to name a few. For Hawaii, we are dependent on the visitor industry which is subject to the whims of the leisure travel market and on federal spending which is about to be curtailed. While these two giant industries overshadow all other activities, the backbone of Hawaii’s business community is the small business, the mom and pops businesses on Main Street and the budding entrepreneur.

In order to accommodate a higher minimum wage, these small businesses will, no doubt, have to trim other costs if they can, raise their prices, or shrink their workforce. At a time when unemployment continues to be worrisome, the latter option is untenable. Instead of growing the number of jobs, a hike in the minimum wage, at this time will, no doubt, force businesses to reduce their workforce or freeze wages.

An interesting twist to this is government itself. While public employees enjoy the benefits of collective bargaining and having advocates bargain for their wage increases, those organizations which are dependent on state and county contracts do not. Observers cynically point out that while the state or federal government may increase the minimum wage, it is doubtful that state or county contracts will be increased to accommodate the fact that many of the contractors - largely nonprofit, social service organizations - pay workers the minimum wage. Since these organizations have no way of increasing the cost of their services, they have no choice but to reduce the number of workers or the number of hours worked.

The other unusual quirk in the Hawaii minimum wage law is that although the federal minimum wage law allows employers of workers who can earn tips or gratuities to be paid up to 50% of the federal minimum wage, the Hawaii differential is only 25 cents. The concept of a tip credit wage is that the tipped employee has an opportunity to earn substantially more in gratuities for superior service. Given the large presence of the hospitality industry in Hawaii, the number of tipped employees is rampant. They include workers like waiters, bell persons, valets, and tour guides. This allows employers to pay a little more to those who don’t receive the gratuities, like the dish washers and the food prep assistants in the “back of the house.” However, with only a 25-cent differential, there isn’t much to shift to the non-tipped employees in Hawaii.

There are already programs that strive to train the next generation of workers so that when they enter the workforce they will have skills that will earn them more than minimum wage. The community colleges in collaboration with the department of education through the Career Technical Education (CTE) program is providing this kind of training so that students not only stay in school and earn their diplomas, but go on to community college to further their education or join the workforce with skills that secure a job that will pay more than minimum wage. This is a boon for employers as they are getting workers who are already trained, saving them the cost of training unskilled workers, a commodity worth its weight in gold.

So while increasing the minimum wage may be the politically correct position to advocate, elected officials should keep their sights trained on supporting a skilled workforce that will not only improve productivity but raise the standard of living for all workers.

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