Throughout 2021, many states have suffered from labor shortages, unprecedented inflation, and an ever-worsening supply chain crisis. Because of the perilous economic situation, several states are considering quick fixes to address their financial problems, even though these so-called quick fixes would likely make matters worse over the long term.
In the Aloha State, lawmakers recently introduced a bill that would hike the state’s minimum wage. More specifically, Hawaii House Bill 4 proposes raising the state’s minimum wage from $10.10 per hour to $17 per hour by January 1, 2026. If passed, HB 4 would incrementally increase Hawaii’s minimum wage, beginning with an increase to $11.50 per hour on January 1, 2022, moving to $13.50 per hour on January 1, 2023, $14.50 per hour on January 1, 2024, $16.00 per hour on January 1, 2025, before finally hitting $17 per hour effective on January 1, 2026.
In addition, House Bill 4 stipulates that on September 30, 2026, and on September 30 of each year thereafter, an adjusted minimum wage rate would be calculated to replace the current minimum wage rate. Further, the adjusted minimum wage rate shall be calculated to the nearest twenty-five cents using the Urban Hawaii Consumer Price Index, or a successor index, for the twelve months prior to September 1 of each year as calculated by the United States Department of Labor.
Like all states, Hawaii endured lockdowns due to the sudden onset of the coronavirus pandemic, which sent shockwaves throughout the small business ecosystem that are still being felt. Therefore, a minimum wage hike in 2022 could not be more ill-timed. In an analysis based on self-recorded closures in their database, Yelp estimates 60 percent of U.S. businesses have been devastated by the pandemic.
Moreover, Hawaii has had the highest percentage of businesses both temporarily and permanently closed. When ranked by states, Hawaii tops the list with 9.4 permeant closures and 13.4 temporary closures per 1,000 businesses, according to Yelp’s Local Economic Impact Report.
Hawaii relies heavily on revenue from travel and tourism, two industries devastated by COVID-19. Reports from the Hawaiian Department of Business, Economic Development and Tourism from 2019 show approximately 30,000 people arrived in Hawaii daily. Unsurprisingly, this number plummeted to less than 500 at the height of the pandemic. This led to Great Depression-like unemployment levels for Hawaiians. According to Wallethub, Hawaii experienced a mind-boggling 175.5 percent increase in unemployment from September 2019 to September 2021.
Given the ongoing economic upheaval, it is not surprising that some Aloha State lawmakers are considering implementing minimum wage increases in an attempt to provide relief to their struggling constituents. However, this is a deeply flawed and ineffective way to improve the economy.
Moreover, arbitrary minimum wage hikes produce unintended consequences that can inflict even more pain upon the very people they are supposed to benefit. Sadly, minimum wage hikes are one of the most significant reasons grocery store and fast-food chains have moved toward self-checkout kiosks in place of employees, especially teenagers, who have often previously occupied those positions.
Economists Grace Lordan and David Neumark showcase the effects of minimum wage hikes in relation to the increase of automation as a replacement for people in low-wage jobs in their working paper, People Versus Machines: The Impact of Minimum Wages on Automatable Jobs. Lordan and Neumark find that raising the minimum wage increases the likelihood that low-skilled workers become unemployed or employed in inferior jobs, based on data collected from 1980 to 2015.
Minimum wage hikes rarely meet the expectations of the policymakers who advocate for them. For example, they do not raise the living standards in any appreciable way for individuals and families, yet illogical wage increases have the propensity to shutter small businesses for good.
A recent study by the Congressional Budget Office titled “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage” examines how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would adversely affect employment and family outcomes, especially among teenagers and those at the bottom rungs of the income ladder.
Minimum wage hikes also impose a myriad of unintended consequences upon all businesses, especially small businesses—the lifeblood of the American economy. Minimum wage increases force businesses to reallocate capital to cover the increase in employees’ wages, ultimately forcing them to alter spending elsewhere to offset their newly increased labor costs. More times than not, this results in less hiring, a reduction in work hours, and higher prices for consumers. For many small businesses, a minimum wage hike results in bankruptcy, as they are no longer able to remain profitable due to substantially increased labor costs.
Minimum wage hikes are never a viable economic solution. A 2007 study from economists at the University of California-Irvine and the Federal Reserve Board comprehensively examined the body of work on the subject and found 85 percent of the studies they considered credible demonstrate minimum wage hikes cause job losses for less-skilled employees. Furthermore, a 2010 study by economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum wage laws from 2003 to 2007.
At the national level, a recent report from the Employment Policies Institute (EPI) found that a minimum wage hike would cost the U.S. economy two million jobs. The EPI study notes that of those two million, the jobs most likely to vanish are in the restaurant and hospitality industries. These two sectors were decimated by the pandemic. Forcing businesses in these industries, particularly small businesses, to drastically raise their labor costs would devastate the few that have hung on during this harrowing period.
Failed businesses don’t pay property taxes, income taxes, sales and use taxes, and the dozens of other licensing and regulatory fees that governments rely on for revenue. Therefore, arbitrary minimum wage hikes could result in further restricting government revenue, exacerbating budget deficits caused by the pandemic. While politically popular, the downstream effects of a minimum wage increase would certainly create long-term challenges for Hawaii.
It is unwise for Hawaii lawmakers to push minimum wage hikes, which result in business closings and increased unemployment, especially when joblessness remains high due to the pandemic fallout. According to a brief published by the Congressional Research Service during the pandemic, the unemployment rate reached catastrophic levels, unseen in decades. Even more worrisome, the U.S. labor participation rate has fallen precipitously since the pandemic began more than a year ago.
To make matters worse, we seem to be on the cusp of a period of significant inflation. The United States Postal Service (USPS) has recently projected its rate hikes through 2024 via a recent filing with Postal Regulatory Commission. The decision by USPS to include rate increases every six months through 2024 likely corresponds to their assessment of consumer price increases emblematic of inflationary pressure.
Although attempts to bolster a minimum standard of living and protecting low-skilled workers in a recovering pandemic-world are admirable, the evidence is clear: minimum wage hikes accomplish neither of these goals. Raising the Aloha State’s minimum wage to $17 per hour would do little to raise Hawaiians out of poverty while annihilating entry-level jobs throughout the state. As such, legislators in Hawaii should consider all of the economic harm and social angst that Senate Bill 676 would inflict.
