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Increasing Hawaii's Minimum Wage: Panacea or Politics?
Next to civil service reform and building a prison on the mainland, raising the minimum wage may be the hottest issue of the legislative session. Four bills have been introduced to increase the minimum wage this year anywhere from an additional $0.40 to $2.25! According to proponents, raising the minimum wage is necessary to help the working poor, particularly those who will lose their welfare benefits come December 1, 2001. According to opponents, an increase will raise business costs, resulting in the elimination of unskilled jobs and higher prices for consumers. This issue of Economic Currents addresses both sides of the minimum wage debate by drawing on a vast economic literature on the subject. That literature suggests that a small increase in Hawaii's minimum wage is unlikely to significantly reduce the number of jobs available to unskilled workers. At the same time, a higher minimum wage is unlikely to accomplish the goal of its proponents—raising the living standards of the working poor. Nevertheless, politicians may choose to raise the minimum wage since it is both symbolic and does not require any reduction in tax revenues or increase in expenditures for income subsidies.
In 1938 President Roosevelt signed the Fair Labor Standards Act (FLSA), establishing a national minimum wage. Since then the federal minimum wage has been increased 17 times, from $0.25 per hour in 1938 to $5.15 per hour in 1997. Forty-three states have applicable minimum wage laws. Where a state requires a different minimum wage, the higher standard applies. Hawaii’s minimum wage has been $5.25 per hour since 1993, which is 10 cents above the current federal minimum wage. Governor Cayetano's proposal would raise the minimum wage by $0.40 to $5.65. Even though Hawaii's minimum wage was raised in 1993, in real terms (adjusting for inflation) it has declined substantially since the mid 1970s.
There is little doubt that the minimum wage helps to prevent the exploitation of workers and establishes a wage floor for unskilled and part-time workers. However, there are two important questions that should be addressed in any minimum wage debate. First, does raising the minimum wage produce adverse effects on some workers. Second, is the minimum wage an effective policy tool for helping the working poor.
Economic theory predicts that a binding minimum wage will reduce employment of unskilled and part-time workers, since business will find it unprofitable to hire such workers. The excess supply of labor is dispersed in several ways. Some workers will wait in a queue of unemployed workers seeking the minimum wage jobs. Others may find it optimal to accept employment in a sector which is not subject to minimum wage. Thus, theory predicts that some workers will benefit from an increase in the minimum wage, while others will be unable to find jobs because businesses will reduce the number of unskilled workers they hire.
What does the empirical evidence tell us? Most research into the effects of the minimum wage on employment have focused on the demand for teenage workers since they are primarily inexperienced and low skilled workers. As is often the case in the social sciences, the empirical evidence is mixed.
Most research finds that the minimum wage has reduced employment among young people. The estimates vary, but they cluster around a reduction in teen employment between 1 and 3 percent for each 10 percent increase in the minimum wage. Recently, however, some researchers claim to find evidence that a higher minimum wage actually increases employment among teenagers. (See David Card and Alan B. Krueger, 1995, Myth and Measurement: New Economics of the Minimum Wage, Ch. 2, NJ: Princeton University Press). These new results remain controversial, and after hundreds of studies there is no consensus about effects of minimum wage on employment.
The effect of the minimum wage increase in practice will depend on how many workers have their wages raised, and how many workers fail to find employment or lose their job because of the higher wage. If the number of workers who are affected by the higher minimum wage is very small, then it is unlikely that a small change in minimum wage would have substantial effect on employment opportunities in Hawaii. By some estimates, there are a little more than 26,000 workers who would be affected by Governor Cayetano's proposed minimum wage increase. A rough estimate of the impact on minimum wage jobs would be a reduction of approximately 500 jobs. Therefore, a policy of increasing the minimum wage sacrifices as many as 500 jobs for unskilled workers in an attempt to raise the living standards of those workers who still have jobs. However, raising the minimum wage is also unlikely to materially improve the living standards of the working poor.
As an antipoverty tool the minimum wage is undoubtedly inefficient. One reason may be that there is surprisingly little correlation between a worker earning the minimum wage and living in poverty. (Charles Brown, "Minimum Wage Laws: Are They Overrated?" Journal of Economic Perspectives 2 (Summer 1988): p. 143.) Approximately one third of the minimum wage workers in the US are teenagers and not heads of households. Furthermore, most teenagers earning below the minimum wage are not members of poor families. Although Card and Krueger found some evidence of falling poverty rates in states with the largest increases in minimum wage, their estimates are imprecise. In general, economic research has found that only a small number of households below the US poverty line have wage earners working for the minimum wage. If a larger proportion of Hawaii minimum wage earners are members of poor households, raising the minimum wage may prove more successful in improving living standards here.
Economic theory and empirical research both suggest that the minimum wage is a blunt instrument with which to reduce poverty among the working poor. Even at $6.50 an hour, a minimum wage job provides only a meager standard of living. Furthermore, governments have much more powerful tools available to reduce poverty among working poor. The earned income tax credit could be used to provide direct and substantial income subsidies for the working poor. For families with very low income, the credit would exceed taxes due and the family would receive a payment from the government. The earned income tax credit does not directly raise labor costs to businesses, so it does not reduce the demand for unskilled workers. As a result, welfare recipients may be able to find jobs, gain job experience, and go on to earn higher wages as they accumulate skills. Nevertheless, politicians may prefer to raise the minimum wage since it is both symbolic and does not require any reduction in tax revenues or increase in expenditures for income subsidies.
Sang-Hyop Lee, Ph.D.
Assistant Professor of
Economics,
UHERO Research
Associate
Carl Bonham, Ph.D.
Associate Professor of Economics
UHERO Hawaii Director