One of the major agenda items for the new Democratic majority on Capitol Hill has been a hike in the federal minimum wage from $5.15/hour to $7.25/hour. Much to their embarrassment, Democrats found that they could not push legislation through the Senate controlled by the Democrat-Socialist majority without agreeing to a tax cut package to relieve some of the burden they are placing on small business. On Monday, House Democrats caved and approved the tax cuts, paving the way for the bill to become law.
The minimum wage, like all attempts at a command economy, is based upon the idea that there is an ideal “fair wage” or “living wage” that can be set by the government, not the market. Longtime observers are wearyingly familiar with the arguments on this point: liberals argue that it’s unfair to allow people to work for peanuts, conservatives respond that people are free to work for what they will choose. Liberals argue that you can’t raise a family on the minimum wage, conservatives respond that most minimum wage workers are young, single and/or part-time. Conservatives argue that the minimum wage throttles job growth for small businesses and entry-level workers, liberals contend that the job losses resulting from the minimum wage are nonexistent or overstated, conservatives reply that liberals are relying on quack economic studies.
Let’s leave all that aside for now, and assume for the sake of argument that it is actually possible for the government to set a Platonic ideal minimum wage that provides a fairer income to workers with the minimum possible cost to job creation. That still doesn’t answer three questions:
1. Why should there be a single federal minimum wage law for the entire country, covering every local labor market from Midtown Manhattan to Northern Mississippi?
2. If there really is a need for a single federal minimum wage, why does Congress nonetheless permit individual states to have higher minimum wages – and why should Representatives from those states care what the federal minimum wage is?
3. If the goal of a single federal minimum wage is to eliminate ‘unfair’ competition from workers willing to work for a lower wage, how do Democratic proponents of the bill expect it to succeed if it’s not accompanied by stiffer enforcement directed at illegal immigrants who are the people most likely to work ‘off the books’ for a lower wage?
1. Why a Single Federal Minimum Wage?
The case for a national minimum wage set by the federal government is risible. It’s obviously ridiculous to suggest that labor conditions are the same everywhere – even if you did have that magic 8-Ball to tell you what is the “just right” level of government-set wages, it would be radically different from urban to rural markets, and among states and localities with drastically different costs of living. Everyone knows that you can live like a king in some parts of this country on wages that would not make ends meet in New York City.
So why try? The usual saw relied on by liberals to argue against different state regulatory environments for employment and workplaces is the “race to the bottom” – i.e., they admit that markets will work to undermine anti-business legislation but contend that if different states are allowed different rules, they will try to outbid each other in business friendliness and steal jobs from jurisdictions that keep a higher wage.
The first problem with the “race to the bottom” argument in the minimum wage context is, well, if states want to swim against the laws of economic reality, let them take the consequences. Why should other states be compelled against the will of their people to suffer the consequences?
A second problem is that minimum wage jobs actually are not all that mobile, so the net result of a single federal rule will be more to eliminate jobs than to prevent them from migrating elsewhere. Let’s start with some facts about the minimum wage to explain why. As the Labor Department explains, it doesn’t apply without exceptions. First, waiters/waitresses and others who get income from tips may qualify for a lower wage:
An employer of a tipped employee is only required to pay $2.13 an hour in direct wages if that amount plus the tips received equals at least the federal minimum wage, the employee retains all tips and the employee customarily and regularly receives more than $30 a month in tips. If an employee’s tips combined with the employer’s direct wages of at least $2.13 an hour do not equal the federal minimum hourly wage, the employer must make up the difference.
There are other exemptions:
A minimum wage of $4.25 per hour applies to young workers under the age of 20 during their first 90 consecutive calendar days of employment with an employer, as long as their work does not displace other workers. After 90 consecutive days of employment or the employee reaches 20 years of age, whichever comes first, the employee must receive a minimum wage of $5.15 per hour.
Other programs that allow for payment of less than the full federal minimum wage apply to workers with disabilities, full-time students, and student-learners employed pursuant to sub-minimum wage certificates. These programs are not limited to the employment of young workers.
Despite these restrictions, however, the great bulk of minimum wage jobs are not manufacturing jobs but service jobs, in types of businesses that provide services on-site to local customers. Again, the Labor Department keeps detailed statisics on the characteristics of minimum wage workers, who as of 2005 made up 2.5% of the workforce (1.9 million workers), down from more than 15% when Ronald Reagan took office in 1981 (meaning, presumably, that the market has been raising wages without Congressional prompting).
When you look at types of workers, you see that just over half of all minimum wage workers (50.5%) are employed in service occupations, including a whopping 34.4% in “Food preparation and serving related occupations” and 7.1% in “Building and grounds cleaning and maintenance occupations.” Another 16.1% are in “Sales and related occupations.” Looking at industries, 41.1% are in “Leisure and hospitality,” 20% in “Retail trade,” and another 14.6% combined in state and local government and “Education and health services.”
What does all of this mean? Well, what it means is that unlike manufacturing jobs, most minimum wage jobs can’t just pick up and move to another state. West Virginia can’t steal burger-flipping jobs from Chicago, because nobody wants to drive from Chicago to West Virginia for a hamburger. Or to have their hospital sheets changed or their lawn mowed. One state or locality can’t steal jobs of this nature from another. If West Virginians, who have the nation’s highest proportion of minimum wage workers, get priced out of these jobs, they just disappear, meaning not only the loss of employment but also the loss of local services.
That doesn’t mean that variations in the minimum wage has no effect, of course. Capital can still move. To offer a practical example, Dunkin’ Donuts is planning to expand its chain of stores from its Northeast base to go nationwide. I don’t know whether or how many Dunkin’ Donuts employees earn the minimum wage, but I do know that a national chain of coffee & donut shops will undoubtedly look at the cost of doing business in different locales before deciding where to open its stores. Decisions of that nature will be affected by the minimum wage. But since many new minimum wage jobs are created by local small businesses, a federal law that actually affects the living wage in Los Angeles doesn’t so much prevent rural Texas counties from stealing jobs from LA as it does simply eliminate job creation in Texas at no corresponding job gain to LA.
2. Why Allow States To Have Higher But Not Lower Minimum Wages?
If you buy the idea that a single national minimum wage can make economic sense, why on earth would you allow some states to end-run around the federal rule by raising their own state minimum wages above the federal limit? Isn’t that an admission that the federal rule is meaningless in those states – and yet if state governments in other states want to react to local labor conditions by lowering the wage below the federal line, they are prohibited from doing so. How on earth does this make sense?
Under current law, 44 states have a minimum wage equal to or greater than the federal wage. If local lawmakers in those states want to raise the minimum wage to address local working conditions, they are free to do so. This map shows the breakdown of those states – the 30 states in green have a minimum wage above $5.15/hour, and the 14 in blue are equal to the federal minimum:
Even under the new law, by the time the federal wage goes up to $7.25 in 2009, it will already be mooted by equal or higher wage laws in ten states (California, Connecticut, Hawaii, Illinois, Massachusetts, Michigan, Oregon, Rhode Island, Vermont, and Washington), the highest being $8/hour in Illinois. If the federal minimum wage is not satisfactory in these locales, isn’t that yet another admission that a single federal rule can’t possibly get the right answer for every local labor market? And if the voters of those states – every one of them a ‘blue’ state represented by a lot of the Congressional Democrats supporting this bill – have taken care of the ‘problem’ in their own jurisdictions, why should they foist their preferred local wage policies on the rest of the nation?
3. What About Illegal Immigrants?
Finally, the case for the minimum wage is, supposedly, about preventing ‘unfair’ competition by workers who are willing to work for a lower wage. (After all, if employers pay a low wage nobody’s willing to work for, the wage goes up). But any student of economics knows that if you artificially raise the price of something, you create a potential black market. So any plan to raise prices, to be effective, needs to be accompanied by increased enforcement aimed at eliminating the black market.
In the labor market, the black market in cheap labor is practically synonymous with illegal immigrants, who enter the country illegally and exist, for all practical purposes, beyond the reach and protection of federal workplace laws. Most of these workers came here from places where prevailing wages were a lot lower than $7.25/hour, and so they have perfectly good reasons to be willing to work for less than that. Raising the minimum wage only increases the likelihood that jobs that would now be offered to legal American citizens will instead be given to illegal aliens.
But what does the new minimum wage bill do to step up enforcement against this source of cheap, illegal labor? What are its proponents doing to keep illegal aliens out of the work force? It’s the Democrats who are the most ardent advocates of protecting the position of illegal aliens. That alone should demonstrate their unseriousness about the minimum wage. (The fact that Democrats want to legalize many existing aliens is no answer to this, since they aren’t proposing a practical way to avoid having such a path to legalization be seen in Mexico and other countries as an open invitation for still more illegal entry).
Conclusion
Even if you buy the case for a minimum wage, the idea of extending it nationally, allowing some states to render it moot by adding on their own minimum wage, and failing to prevent evasion of the minimum wage by illegal immigrant labor demonstrates to any serious observer that the Democrats aren’t serious about a federal minimum wage being good or effective policy. Once again, they are just playing politics at the expense of job creation, for benefits that are at best ephemeral. All in a day’s work.
Excellent analysis. This is way I read your blog everyday.
Thanks for writing such good stuff!
This should be required reading for our economic “experts” in Congress. I’m not sure if you considered cost of living in your analysis but that is a key part of the argument to me. I used to live on the East coast. When I retired I sold my 3 bedroom house on a postage stamp size parcel of land and moved inland. In Ohio I bought a 5 bedroom house with close to an acre of land for less $$ than the tiny place I sold in Virginia Beach. Obviously, the dollar goes further here than there. Groceries are also cheaper here because we are closer to the source.
As a landlord in the Occupied Territories of the People’s Republic of New York, I am probably more used to government regulations regarding how I am paid more than any other industry. In truth, how the Feds can decide how a local industry that does not travel between states can be regulated by Congress is beyond me. Price regulations have always been the gutless way out–trust me, there is no incentive in NYC to build affordable housing.
No question, it’s a coward’s way out of dealing with immigration and taxation issues. The real answer is probably to do more of what we as a people did last election day: vote AGAINST all of them. Start fresh, and let them (especially the representatives, the Senators are better IMHO) know they don’t have a lifetime job. Don’t care which party, earn it, we just return those jackasses year after year.
It amazes me that Congress continually ignores the fact that minimum wage increases cause more problems for the low income workers than they solve. I was pleased to see a local business here is Missouri that posted a sign stating that their prices were going up due to the increase in minimum wage we voted upon ourselves. People do not stop and think that by increasing the cost of doing business there is a cost that is passed on. My oldest son was working for more than minimum wage at his job, now he has joined the minimum wage ranks and has to pay the higher prices too.
The market will take care of wages. As Crank noted, a very small number of people work for minimum wage. Most businesses pay more than the minimum for all but the most unskilled laborers. What increases in the minimum wage does is increase the number of minimum wage workers and bring more workers toward that minimum level and therefore creates a larger lower income class. The workers that were above the minimum wage threshold before do not get a corresponding raise to maintain their level above the minimum.
As Crank correctly pointed out, artifically controlling wages in the marketplace has many consequences and few of them are good.
As I’m sure the Crank is aware, congressmen from districts with higher minimum wage laws like to see the Federal rate popped so their districts are not outpricing the market and losing jobs to Biloxi.
There’s no point in teaching any politician any of this. The ones who care about the economics of the issue know it and the ones who don’t don’t. But they all vote based upon how it looks to their constituents and their supporters and they give a tinker’s damn for the economic effect.
Except, of course, for the politician losing jobs to Biloxi.
Good analysis Crank and I agree completely. If Congress can waive a magic wand and set wages across the country, without considering productivity, the labor supply and pricing, why doesn’t it set it at $20 or $25 an hour?
But you know what? The minimum wage is Democrat’s Flag Burning Ammendment. It makes no sense, but it sends Republicans running for cover every time.
Well, except that the flag burning amendment doesn’t cost anybody their job.
The First Ammendment is far more important than any effects the minimum wage has ever had – positive or negative – on our economy. And I am not just preaching — once you allow the government to dictate how we discuss or pay tribute to our (great) country, you head down a very dangerous slope.
The minimum wage is good politics for the Left. Any Republicans who oppose it will be branded as opposing a fair wage for hard working Americans and the media will of course go along with this. If the minimum wage increase is passed and it prices a certain number of jobs out of existence well that just means more poor people who are now dependent on the government. It’s win-win for the Left.