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Contradicting Push for Economic Growth

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By Lowell L. Kalapa

Among the many issues this administation has vaulted into the legislative arena, none is as contradictory to its supposed efforts to jumpstart the economy than its proposal to boost the minimum wage beyond the federal minimum wages.
The proposal to boost the state minimum wage is premised on the perception that many of those who earn the minimum wage are welfare recipients who are being forced off the welfare rolls into jobs by federal welfare reform. Proponents argue that because the minimum wage is so low, many of these people do not make enough and therefore fall below the poverty level. Thus, the minimum wage needs to bring them above the poverty level.
Unfortunately this line of reasoning is evidence of a lack of understanding of the world of economics and the free market system. It is a lack of understanding of the role of wages and prices and supply and demand for goods and services and more specificially the delicate balance between the cost of production and the cost of living.
For those who run businesses and have the challenge of meeting payroll every week or every two weeks, how much it costs to hire one more person to the payroll has a direct impact on the ability of the business to stay in business. Some might argue, “What would fifty cents more per hour mean to the employer?”
Well, if an employer had ten employees who worked at the minimum wage level and the government decided to raise the minimum wage by fifty cents, the employer would have one of two choices. The employer could raise the price of his product or service so that he had enough additional cash to pay the additional fifty cents per hour for each employee, or in the alternative, the employer could let one of the ten employees go and use the savings to pay the remaining nine employees the additional fifty cents.
If the employer chooses to raise the price of the goods or services sold by his business in order to accommodate the increase in the minimum wage, then all of his customers will have to bear the additional cost and the cost of living will rise by the increase of the goods or services. A rise in the cost of living will then erode whatever gains may have been realized by the increase in the minimum wage. This is the vicious circle as it begins to churn. Prices rise and demands for higher wages are made. Higher wages push the cost of production up and prices follow.
There is nothing wrong with periodic adjustments in the minimum wage if there are reasons to warrant those increases, but given the fact that inflation has been relatively tame in the past few years and in fact there was a period of deflation a couple of years ago, there is little reason for Hawaii to step out on a limb and suggest a substantial premium in the state minimum wage over the federal standard.
Oh yes, and what about that concern for former welfare recipients who will be forced to go to work for a minimum wage? Well, consider this, if there are less jobs because the employer has to spread whatever he can pay in payroll over fewer workers, what do you thing will be the potential for job opportunities for the former welfare recipient? So instead of improving the prospects for the former welfare recipient, raising the minimum wage will probably reduce the number of opportunities to find that badly needed job.
Finally, while it may be an inaccurate generalization, many welfare recipients do not have job skills, and in fact, the federal welfare reform act recognizes that job training is essential for welfare recipients to make the transition. Thus, if the minimum wage is increased, employers will want to hire the most skilled and experienced workers given the higher cost of labor as a result of the higher minimum wage. Again, the unskilled or the minimally trained former welfare recipient will be at a disadvantage.
Lawmakers who believe that they are helping the poor by raising the minimum wage are probably those who have never run a business in their lives. Instead of bettering the lot of the poor, raising the minimum wage will probably have the opposite impact of reducing the job opportunities available to the poor. For the consumer, the cost of living will again be exacerbated.

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