Minimum-wage bill is wrong tool for the job

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The following testimony was submitted by the Grassroot Institute of Hawaii on Jan. 26, 2022, to the Hawaii Senate Committee on Ways and Means, which was to meet Jan. 27, 2022, to consider increasing Hawaii’s mandatory minimum wage to $18 an hour by 2026.
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Dear Chair and Committee members:

The Grassroot Institute of Hawaii would like to offer its comments on the portion of SB2018, which proposes increasing Hawaii’s mandatory minimum wage to $18 an hour by 2026.

The Grassroot Institute of Hawaii is concerned about the possible effect of this legislation on Hawaii’s economy, especially as local businesses struggle to recover from the COVID-19 lockdowns.

The proposed wage increase represents a 78% increase in the minimum wage in less than four years. For many local businesses — especially smaller businesses and those with thin margins — nearly doubling personnel costs would be a recipe for disaster and nearly guarantee their closure.

There is no real mystery to what will happen if this increase is passed. We urge the committee to listen to the testimony of the many businesses who have made it clear that this bill would mean closing their doors or raising their prices. In one stroke, this legislation would contribute to raising the cost of living in Hawaii, destroying local businesses and putting more people out of work.

There is ample research data to indicate that this bill, if enacted, would fail in its intent to help lift the state’s working families out of poverty. Recent years have seen a glut of research demonstrating that far from helping low-wage employees, minimum-wage hikes are more likely to increase their economic burden as businesses cut hours, turn to technology or even cut jobs in order to mitigate the higher costs.

A 2021 analysis of minimum-wage research from the National Bureau of Economic Research debunks the claim that minimum-wage hikes do not reduce employment. On the contrary, the NBER meta-analysis found that, regardless of how researchers interpreted data to support a particular position in the minimum-wage debate, there is a clearly negative effect on employment associated with minimum-wage increases: Across all studies, 78.9% of estimated employment elasticities were negative.

The impact of wage increases was especially hard on the teens, young adults and the less educated. And in studies of directly affected workers, the negative employment effects were even more obvious.[1]

For example, in August 2018, a University of Washington study found that increasing Seattle’s minimum wage from $11 to $13 an hour resulted in both the loss of about 5,000 jobs and an average cut in pay for the remaining employees of about $125 a month, thanks to a cut in their job hours of more than 9%.[2]

Proponents of a minimum-wage hike often point to a few highly limited surveys that suggest raising the minimum wage can be economically neutral, but as the newest research from NBER demonstrates, the data demonstrates that the opposite is true. Study after study shows that when a municipality drastically raises its legal minimum wage, low-wage employees suffer.

In 2010, researchers from the National Bureau of Economic Research and the Federal Reserve Board compiled the results of 53 scholarly studies into a book, “Minimum Wages,” and concluded there is “no compelling evidence that minimum wages on net help poor or low-income families, and some evidence that minimum wages adversely affect these families, and increase poverty.”[3]

Examining the idea that higher minimum wages will reduce poverty, those same researchers found that the opposite was true. While some low-wage workers do make more money, the gains are offset by loss of employment or hours for other workers. The researchers found that a minimum-wage hike increases the proportion of poor families by simply redistributing wealth among low-income earners.[4]

Because the number of families that fall into poverty from a minimum-wage increase slightly outstrips the number of families that escape poverty from the minimum-wage increase, the state is likely to see a slight increase in the number of families living in poverty following a minimum-wage hike.  This is a further demonstration of why minimum-wage hikes are the wrong tool to address poverty.

The minimum-wage debate is often framed as a fight between businesses and employees. In truth, raising the legal minimum wage can hurt both. Employment declines as businesses find ways to cope with the increased cost. Some stop hiring, some turn to automation and some demand more work from the employees that stay.

For businesses that already have to contend with low margins and high risks, even a moderate increase in the minimum wage can be sufficient to drive them out of business.

In 2017, Dara Lee Luca of Mathematica Policy Research and Michael Luca of Harvard Business School looked at restaurant closings in San Francisco after the minimum wage was raised to $13 an hour. The pair found that the higher minimum wage led to the death of many mid-range restaurants, as well as fewer new restaurant openings. For every dollar that the San Francisco minimum wage went up, there was a 4% to 10% increase in the likelihood of restaurant closings.[5]

The Grassroot Institute of Hawaii prefers policies that would strengthen our state’s economy and benefit both businesses and employees. This bill, however, may have a negative effect on employment in general. Not only would companies in Hawaii likely be forced to lay off workers or cut hours or benefits in order to afford increased wages, they also likely would slow or even stop new hiring.

If we want to establish our state as a desirable place to do business, we cannot continue to treat company profits as an endless funding source for the state’s social initiatives.

It is not fair to assume that Hawaii’s employers are intentionally underpaying their employees or to assume that the government is more capable of addressing the payroll limitations of a business than the business owner is.

Policymakers are focusing on raising the minimum wage in the effort to make the state more affordable, but the minimum wage is a poor tool for that purpose. They should focus instead on policies that increase our purchasing power — that is, lower the cost of living — and make our state more prosperous as a whole.

A combination of tax relief and a reduction in the obstacles that the state places in the way of business and entrepreneurship would be the best way to move forward, to improve both our economy and the plight of low-wage workers.

In contrast, this proposed minimum-wage bill, SB2018, would more likely hurt than help Hawaii’s businesses and low-income working families.

Thank you for the opportunity to submit our testimony.

Sincerely,

Joe Kent
Executive vice president
Grassroot Institute of Hawaii
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[1] David Neumark and Peter Shirley, “Myth or Measurement: What Does the New Minimum Wage Research Say About Minimum Wages and Job Loss in the United States?” NBER Working Paper 28388, National Bureau of Economic Research, Cambridge, Mass., May 2021.

[2] Ekaterina Jardim, et al., “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle,” NBER Working Paper 23532, National Bureau of Economic Research, Cambridge, Mass., May 2018, https://www.nber.org/papers/w23532.

[3] David Neumark and William L. Wascher, “Minimum Wages,” The MIT Press, Cambridge, Mass., August 2010.

[4] David Neumark and Wiliam Wascher, “Do Minimum Wages Fight Poverty?” NBER Working Paper Series, Working Paper 6217, National Bureau of Economic Research, Cambridge, Mass., August 1997.

[5] Dara Lee Luca and Michael Luca, “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit,” Harvard Business School NOM Unit Working Paper No. 17-088, April 2017 (revised August 2018).

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