Three important questions about the minimum wage

Before our legislators vote on whether to increase Hawaii’s minimum wage, I encourage them to ask three very important questions:

>> Who are we trying to help?

>> Who would actually be affected?

>> Is the minimum wage the best way to help low-income families?

Clearly, many people believe that increasing the state’s minimum wage level would address poverty and income inequality. But numerous studies conducted over several decades say something very different.

Rather than help struggling single mothers escape from poverty, an increase in Hawaii’s minimum wage is more likely to pad the paychecks of upper-middle-class teenagers or recent college graduates on their way to well-paying careers.

That’s what I learned Monday from David Neumark, economist and co-director of the Center for Population, Inequality, and Policy at the University of California, Irvine, who was my guest on “Hawaii Together” on the ThinkTech Hawaii network.

Neumark is the author of “Minimum Wages,” published by The MIT Press, and is considered the nation’s foremost expert on the topic.

He said supporters of minimum-wage increases often claim that the findings of minimum-wage research are uncertain, showing a wide variety of effects. But this is a mischaracterization of the data.

Instead, he said, a review of almost all of the relevant studies since the 1990s shows that mandatory wage hikes have an overwhelmingly negative effect on jobs and labor in general. In other words, as the minimum wage goes up, people lose jobs, income and work hours.

There was one much-ballyhooed study in the early 1990s that showed positive effects from a wage hike, but that, said Neumark, has since been discredited for its poor data-gathering techniques. Ironically, it was produced by one of the three economists who were awarded last year’s Nobel Prize in economics.

Neumark said that for businesses, a minimum-wage hike is like a tax on labor, with predictable results.

“Taxes tend to discourage the use of the things you’re taxing, unless it’s something you absolutely can’t do without,” he said. “So as long as there are substitutes for lower-skilled workers, a higher minimum wage effectively will [make] using that labor more expensive, and that’s what creates the trade-off at the end of the day.”

Neumark acknowledged that some people benefit from minimum-wage hikes. After all, they get a pay raise, so it must do some good, right? Unfortunately, the pay increases don’t necessarily help the people they are intended to help, such as struggling single mothers trying to put food on their tables.

He said even if you assume there are no negative effects due to the minimum wage, only 15% of minimum-wage increases typically go to families at the poverty line, versus about 40% for families with above-median income.

“Nearly half the benefits go to families in the top half of the income distribution, and it’s exactly because there’s a lot of young workers who are on minimum wage, just because they’re young and they don’t know anything yet,” Neumark explained. “They’re not going to be poor later. They might be an MIT engineer later on, but they have to have some job in high school making coffee, … so they get the benefits when you raise the minimum.”

In other words, Neumark said, “the minimum wage is a really blunt tool to try to affect the underlying problem.”

Instead, he said, lawmakers should focus on programs that target government benefits based on being poor or low income. Policies that encourage people to work, rather than discourage it, also are valuable, he said, “because we know that people’s earnings and wages grow with labor market experience.”

Neumark also championed the earned income tax credit as a way to directly help needy families.

My own recommendation is that our legislators focus on cutting taxes and growing the economy to make Hawaii more affordable. A general excise tax exemption for food, medical services and other necessities would help, as would removing barriers to more housing, to help lower the cost of putting a roof over your head.

Here in Hawaii, there still are a few bills alive at the Legislature that seek to increase the state’s minimum wage by almost 80% within the next few years. The rationale is that it would help low-income workers in Hawaii.

But the data doesn’t lie: A higher minimum wage would, indeed, help some workers. But others would be hurt by it, and most of the people it is intended to help would not benefit at all.

“What does a higher minimum wage do to the poverty rate or some other measure of the instance of low income?” Neumark asked rhetorically?

“Essentially,” he said, “you can’t find any strong evidence, I think, that minimum wages reduce poverty. It’s probably largely a wash, whereas, obviously, a policy that is intended to reduce poverty, the instance of low income, ought to have an effect.”

Long story short, if we really want to help Hawaii’s working families, we will have to roll up our sleeves and work together to lower the cost of living and make Hawaii more prosperous.

This commentary was Keli’i Akina’s weekly “President’s Corner” column for April 2, 2022. If you would like to have his columns emailed to you on a regular basis, please call 808-864-1776 or email info@grassrootinstitute.org.

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