About the Author

Jensen Ahokovi

Jensen Ahokovi is a research associate with the Grassroot Institute of Hawaii.

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 SB 2018 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.

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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.

graphic for Jensen Ahokovi CV on minimum wage Jan 2022

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.

Economic Backbone

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.”

Policies like the minimum wage merely address the symptoms and not the cause of our state’s larger issues.

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.

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About the Author

Jensen Ahokovi

Jensen Ahokovi is a research associate with the Grassroot Institute of Hawaii.

Latest Comments (0)

Really stated his position in the first paragraph; you can almost hear his disdain for "low-wage" workers.When can we finally put the argument of minimum wage vs. living wage to bed? Anybody working full-time hours should be able to support themselves.The flaming liberal in me says we should be tying minimum wage to the cost of living. (Yes, I know there are numerous issues that wouldn't make this feasible.)

Michael · 2 years ago

I'm wondering what the legislators were thinking beside getting re-elected when passing this $18 minimum? There will be a major impact for all businesses and the general public; less job opportunities and price increases for all. Raising the minimum wage will give all sectors a pay raise as well. Didn't all the legislators approve for themselves a 12% raise effective 1/2022 from receiving annually $62,604 to $70,584? Are they trying to justify raises? hmmmmm?

2cents · 2 years ago

Government is always ready to pass the buck (no pun intended) to the private sector, in this instance regulating what people will get paid, and how it is supposed to help low wage earners survive in Hawaii's toxic high cost of living environment. Rather than focus on it's stifling taxation on the lowest income earners they think they can raise their way out of this mess by making the private sector reward entry level jobs into economic prosperity by raising the minimum wage. You may as well target $25.00/hour so as not to miss what may defined as a "living wage." And if that is the case, what do you suppose businesses will need to pay college level graduates, or those with significant experience? Should these entry level jobs become highly compensated just because? With no increase in productivity or benefit to the employer? Only the government can and does that because it does not have to make it income. For the rest of us, the equation is cost-benefit. It's time the state looks at it's own draconian taxation practices, starting with GET on everything. Work on making the cost of living go down and stay out of the way.

wailani1961 · 2 years ago

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