Chart courtesy of Marginal Revolution University
The following commentary was published originally on Jan. 27, 2022, in Honolulu Civil Beat.
Last week Senate Bill 2018 — a proposed minimum wage increase to $18 per hour over the next four years — was introduced by state lawmakers. Although SB2018 is proposed with good intent to help local low-wage workers, there is a vast literature that suggests that minimum wages have the opposite of the desired effect on the low-wage labor market.
First, it should be noted that according to standard microeconomic theory, a price floor — in this case, the minimum wage — imposed above the market wage in competitive labor markets increases the quantity of labor supplied and in turn decreases the quantity of labor demanded. Thus, we would expect that firms demanding a lower quantity of labor will offset the cost of the minimum wage through unemployment.
But of course, the real world is not so simple.
In 1993, Nobel laureate economist David Card and co-author Alan Krueger published a monumental paper where they found “no indication that the rise in the minimum wage (in New Jersey) reduced employment.”
Card and Krueger’s paper effectively bifurcated the subsequent literature on minimum wages.
With that in mind, doesn’t that make my initial argument moot? Not exactly.
Although unemployment is a valid and key metric through which we can measure the impact of minimum wage hikes, a constantly changing economy means that businesses continue to adapt and innovate new practices to offset regulatory costs. In other words, laying off employees is but a single tool at the disposal of businesses to adapt to minimum wage hikes.
For example, University of Washington economist Jacob Vigdor and his co-authors studied the impacts of Seattle’s incremental increase of their minimum wage to $15 in a 2016 study.
“So, when we look at the low-wage labor market overall, what we’re picking up is the amount of money paid out in the low-wage labor market declined … the less experienced workers who at least had a job to start with, were more or less breaking even: their increase in hourly wages was being pretty much offset by a reduction in hours,” said Vigdor in an interview with economist Russ Roberts.
In a 2021 study by researchers at the Georgia Institute of Technology, Cornell University and the University of Washington, they found that “a $1 increase in the minimum wage, while having a negligible impact on the total labor hours used by the stores, leads to a 27.7% increase in the number of workers scheduled per week, but a 20.8% reduction in weekly hours per worker.”
In addition, the researchers found that “the minimum wage increase reduces the consistency of weekly and daily schedules for workers.”
Moreover, it is imperative to think about the demographics that disproportionately predominate the low-wage hourly paid labor market: young and inexperienced minorities. Of equal importance is that minimum wage work tends to be concentrated in the leisure and hospitality industries — the backbone of Hawaii’s economy.
In a 2021 working paper published via the National Bureau of Economic Research, economist David Neumark conducted a meta-analysis of all published US-based minimum wage research and found that the “evidence of negative employment effects is stronger for teens and young adults, and more so for the less-educated.”
According to House Majority Leader Della Au Belatti, state lawmakers “are very focused on working families.”
But, in light of the evidence, it seems that minimum wages are largely a tax on the very people lawmakers are trying to help. Are our state lawmakers so sure that a proposed minimum wage increase to $18 will achieve the outcomes that many workers surely deserve?
Policies like the minimum wage merely address the symptoms and not the cause of our state’s larger issues. The largest issue being Hawaii’s exorbitant cost of living.
Unless lawmakers decide to drastically reform the detrimental policies — like the state’s strict land-use regulatory burden — that hurt the economic livelihoods of the local community, higher minimum wages and similar social welfare policies will impose a net cost, however well-intended those policies may be.