Just a vicious circle, higher minimum wage, higher prices

With the state administration and the president both calling for an increase in the minimum wage, it would be worth it to look at the issue from an economic and financial well-being standpoint instead of from an emotional and social welfare perspective.

The very idea of raising the minimum wage, at the state or federal level, has a lot of political appeal, since most people believe they should be earning more than they already are. It is all about ego and self-esteem that we are all worth more than we are currently being paid; let’s get that out of the way.

Let’s also get rid of the erroneous belief that most of the workforce is earning minimum wage. The majority of Americans — those who are still employed — are making more than minimum wage, either because of their longevity in their careers or because of their occupation. Who is the president speaking of when he talks of those living below the federal poverty line, earning the minimum wage? Workers who make the minimum are largely the unskilled labor force, including youth working part-time jobs after school or during summer, spring and winter breaks.

Minimum wage earners are just that, people in the labor force who have no advanced skills other than to show up and do tasks as directed. This is not to demean those workers, but to clarify that the minimum wage is paid as a floor that is required of employers for every employee regardless of the level of competency or skills the employee may possess. In that respect, the minimum wage may be considered compensation of entry level workers. Whether this is good or bad depends on your perspective.

From the workers’ point of view — and perhaps the president’s perspective — there is no way a person could survive based solely on compensation paid at minimum wage. But then again, the minimum wage was never considered to be a living wage, but rather an entry level pay scale. It allowed workers to be employed and gain experience — something employers want to see when shopping around for employees. How many of us remember going from door to door hunting for our first job only to be turned away because we had no experience?

But that is where the minimum wage provided the opportunity for many young workers to get in the door on the promise to work hard and a willingness to do a job that gave them the experience needed for a better job. A truly bare minimum wage of $1.10 or $1.25 an hour allowed employers to hire more unskilled workers so they could at least try their hand at a position for which they could claim work experience.

If the minimum wage rises to $8.75 or $9 per hour, where will employers get the money to afford entry level workers? The employer could raise the cost of goods and services sold by the business; if all businesses take that strategy, the overall cost of living and working in this state will get even more expensive. Will that single mom the president wants to help be better off with the higher minimum wage if the cost of groceries also goes up?

Policymakers need to remember many of the mandatory benefits and premiums associated with an employee are based on the amount of compensation received by the employee. These include the cost of Social Security and Medicare premiums including that paid by the employer, unemployment compensation insurance and worker’s compensation. As wages rise, so do the premiums for these coverages since they are based on the employee’s wages.

Of course, organized labor would love to see an increase in the minimum wage as it sets the floor of the amount paid for unskilled labor. A higher minimum wage contributes to what is known as wage or salary compression, pushing the floor higher and bumping up against what is paid for skilled labor.

Is there a way to address the challenge of providing a living wage as the president argues? Next week we will look at some alternatives to this problem.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.