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Minimum wage removes first rungs of success ladder

Honolulu Star-Advertiser article on April 19, 2013

Minimum wage removes first rungs of success ladder

By Cliff Slater

One can laud the intentions behind raising the minimum wage, but the outcome of a hike only harms those it intends to help.

As the University of Hawaii Economic Organization wrote recently, "As an antipoverty tool the minimum wage is undoubtedly inefficient. There is surprisingly little correlation between a worker earning the minimum wage and living in poverty. Approximately one-third of the minimum wage workers in the U.S. are teenagers and not heads of households. Furthermore, most teenagers earning below the minimum wage are not members of poor families."

Minimum wage rates hurt extremely low-skilled workers because it deprives them of a start up the earnings ladder. It is one of the reasons why Hawaii's teenage unemployment is nearly four times that of other working age groups.

Think of the opportunity ladder as $1 an hour on the first rung with a dollar increase for each rung up to, say, $40 an hour. Most folks earn an hourly amount somewhere in the middle of the ladder and many, if not most, started work earning near the bottom.

There is a huge variability of skills all the way up the opportunity ladder. There are highly educated people without other desirable skills at the low end of the ladder, and uneducated but highly skilled and experienced people at the top end.

What is the labor worth of an unskilled, uneducated person who speaks no English and has no work experience? Such a person's labor is usually not worth the present minimum wage, let alone any increase.

This is not about the value of the person, but rather the value of the person's labor. Private employers must at least break even paying such an unskilled employee if they hope to stay in business. The proposed $8.75 an hour with mandated benefits will result in total costs to an employer of well over $2,000 a month for a full time employee.

Most people earn far more than the minimum wage because their aggregate skills are of value to the employer. Employers needing skilled people must bid up wages to both retain their own employees and to be able to hire away from other businesses. They can only bid those wages up if they can pass along the costs of the goods and services they produce at prices consumers are willing to pay.

If workers' labor is not cost effective, businesses turn to labor-saving equipment or overseas suppliers, or cease doing business. The same people who propose the minimum wage hikes are the first to then complain about greedy businesspeople sending jobs overseas.

Few disagree with the idea that working people need to make an amount they can live on. However, to think that government can impose what are really welfare costs on businesses is wishful thinking.

What we need to do about our under-skilled people is to get them on any rung of the opportunity ladder even if it is $2 an hour. People who start out at low wages rarely stay there. They learn English, they gain experience in a particular trade, and even without going to school, they will learn simple math on the job and start going up the opportunity ladder.

We know how to supplement low wages with supplementary welfare income or earned income tax credits. Above all, we must not delude ourselves that business can afford to subsidize what are rightfully government welfare benefits.

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