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Wage hike would hurt
employers and workers

A few months ago, California Gov. Arnold Schwarzenegger vetoed a bill that would have increased his state's minimum wage. At the time he said, "Now is not the time to create barriers to our economic recovery or reverse the momentum we have generated." The wisdom of those words deserves to be heard in Hawaii .

A higher minimum wage can have negative employment implications for the demographic groups it is trying to help, and it is not likely to be effective in reducing poverty. Proponents of an increase point to the declining real purchasing power for those individuals who depend on the minimum wage to support their families. Yet economists have long argued that increasing the minimum wage results in increased unemployment and/or reduced hiring. Moreover, the very individuals that the minimum wage law was designed to protect -- entry-level, low-skilled workers -- are the most prone to losing employment when businesses are under a cost squeeze.

Supporters of increasing the minimum wage often argue that low-wage earners have to support their families on a minimum wage income. However, the U.S. Census Bureau reports that nearly two-thirds of minimum wage recipients either live with their parents or are the secondary earner in the household. Only 14 percent of minimum wage recipients are the sole earners in their household, and sole breadwinners qualify for the Earned Income Tax Credit.

In 2000, the EITC supplement was around $2 per hour -- as much or more than many of the current proposed increases in the minimum wage. In fact, recent studies suggest that the EITC is a better tool for reducing poverty than increases in the minimum wage; and, best of all, the EITC does not have negative side effects such as higher unemployment.

Another argument against increasing the minimum wage would be the labor market itself. The latter 1990s produced an economic climate in which many firms paid wages exceeding the minimum due to competition for workers. In such a competitive market for laborers, the minimum wage is virtually irrelevant, as market forces work without intervention. Further, firms were able to pass on those increased costs to their customers. The economic climate is much different today. With a recovering economic climate, consumers are more price-sensitive. The ability to pass along wage increases to the consumer will certainly be hampered -- especially for small businesses. This leaves reducing the least productive workers or hiring fewer new employees as the primary options available to businesses to absorb escalated wages. Policies that threaten to increase labor costs likely will create more unemployment, exacerbate poverty and weaken the overall economic situation.

Research from the Small Business Administration's Office of Advocacy shows that small business hiring has led us out of past recessions. Small businesses create 60 to 80 percent of the net new jobs in the U.S. economy. In Hawaii, small firms employ more than 57.6 percent of the private workforce. Moreover, 96.7 percent of Hawaii's businesses are classified as small. Clearly, any policy shift that increases costs to this important sector will slow economic recovery and job creation.

Our priority should be to revive the economy and create new jobs, not to impose additional new costs on small businesses and risk losing the jobs we already have.

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