Whither The Wage Floor? Better That It Wither: Part II

The States Are Alright

As discussed in Part I, the federal minimum wage shouldn’t be raised because it restrains individual choice and obstructs jobs. But even if the benefits outweigh the costs, a minimum wage is most effectively implemented by each state free from an indefensibly harmful federal mandate.

First, states with unrestrained control over their minimum wage can experiment with a low as well as a high wage floor, thereby establishing valuable live examples to study, measure, and follow. Second, states are in the best position to address and mind their local concerns that are often too varied for remediation by uniform command.

Refraining from raising the federal minimum wage is therefore the best answer to the minimum-wage question.

Set, Study, Copy. Repeat.

States should be free to set their minimum wage however high or however low their representatives think is best. That affords states the greatest flexibility to devise policies to promote economic health. The results can then be studied and measured, serving as important evidence of success and failure to assist every state in their pursuit of prosperity. Justice Louis Brandeis described this advantage of federalism as follows:

It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, dissenting).

States retain the right to raise their minimum wage to any height; the federal government imposes no upper boundary. Washington has the highest at $9.32, Oregon is next at $9.10, followed by Vermont at $8.73 (see here). All are above than the federal floor. Some local jurisdictions have an even higher minimum: Sonoma, California’s is $15.38 for city workers; SeaTac, Washington’s is $15; and San Francisco, California’s is $10.74 (see here, here, here).

If these high wage floors produce economic benefits, other states can adopt a similar policy. Compulsion isn’t necessary with a compelling example nearby.

But states should be equally free to establish a low wage floor. A low minimum that results in economic success can be followed, while one that results in failure can be avoided. But no state has the right to permit lower wages than the federal rate or to forgo a minimum altogether; the federal law is preemptive. States can’t allow employers and employees to negotiate wage rates without federal interference. That’s a problem.

What’s especially peculiar is that there’s more consensus that an excessively high wage floor causes harm than that a low one does. Yet states are free to set a limitlessly high minimum wage while the federal government forbids states from setting a minimum wage that’s too low. The rationale for this unidirectional angst is difficult to ascertain.

Clearer to discern is that there’s little justification for a federal imposition.

Twenty-one states plus the District of Columbia have a minimum wage that’s higher than the federal floor. This evidence establishes that minimum wages would survive even if the national floor were repealed or simply not raised. Proponents who fear the vices of the marketplace should take solace in state governments’ interference.

The concern may be that the federal law is necessary to prevent states from competing for an ever-lower minimum, perhaps at the behest of businesses. That could entice other employers in search of lower costs to relocate to a low-wage state, thereby forcing states that would otherwise set a high minimum to acquiesce to a lower wage floor.  

That’s unlikely.

Workers are attracted to high pay just as businesses are attracted to low costs. That means if a critical mass of workers move to high-pay states leaving low-wage states without a sufficient labor supply, low-wage states would be forced to increase pay either by legislation or by market pressures. Furthermore, not many companies would leave one state to another for lower wages because businesses most affected by the minimum wage are in the service industry; relocating is akin to exiting an entire consumer market. Economist Robert Reich explains (here) that the “jobs at this low level of pay are all in the local personal service sector.”

Manufacturing companies pose a more serious concern because they can easily relocate and continue to serve the old communities. But according to the Bureau of Labor Statistics, only 60,000 jobs at minimum wage are in “production”; the National Association of Manufacturers estimates (here) that the average manufacturing worker in 2012 earned $77,505, the equivalent of about $38.75 per hour. These are high-paying, high-skilled jobs that aren’t directly affected by the minimum wage.

To the extent that the minimum wage bears on outsourcing at all, an ever-rising federal wage floor only hastens jobs exportation to cheap overseas labor. If states were afforded the freedom to eliminate a minimum wage and bargain with workers absent government interference, companies considering sending factories to foreign countries would have reason to reassess the costs and benefits of keeping factories and jobs in the United States, thereby reducing the outsourcing gap. A federal minimum wage forecloses that option.

Resisting a minimum-wage raise provides states with a greater range of policy prerogatives that can serve as valuable examples of success and failure.

From Puerto Rico With Love

States should set their own minimum wage because they alone can most effectively discern and address their particular economic needs. Devising a uniform minimum wage is actually a fool’s errand because the economies of the numerous jurisdictions subject to federal law are prohibitively diverse.

For example, in 2012 the average median income of the three highest states was $69,500 whereas the average median income of the lowest three was $39,134 (see here); the average income of the top three states is approximately 78% higher than the lowest three states. The problem with a national mandate is that it applies to all jurisdictions equally irrespective of the locale’s particular circumstances. Merrill Matthews of the Institute for Policy Innovation explains (here) as follows:

 

A federal minimum wage set high enough to help people in high-cost states would be so high that it would have a big negative impact on low-skilled workers in the low-cost states.  Conversely, a minimum wage set low enough to not be detrimental to workers in low-cost states would do little for those in the high-cost states, because so many already make that much or more.

The federal minimum wage is insensitive to this income disparity and is susceptible of being simultaneously destructively high and ineffectively low.

Arkansas Senator Mark Pryor recently announced his opposition to a federal minimum wage of $10.10 (see here), calling the increase “too much, too fast.” Instead, Senator Pryor supports raising Arkansas’s minimum to $8.50 from $6.25. Arkansas, one of the poorest states in the nation with median income in 2012 of $40,112, should set its minimum wage according to its specific needs.

  

When compared to the widely varying nation-wide incomes, the difficulty of establishing a single minimum wage is clearer. A full-time worker at $7.25 earns $14,500 over a 2000-hour year. That’s about 22% of the average income in the richest four states and about 36% of the average income in the poorest four. At $10.10, a full-time employee’s yearly income is $20,200, which is 31% of the average income in the richest four states and 50% of the median income of the poorest states.

Puerto Rico serves as an extreme example of the problem of a uniform wage floor. Puerto Rico is subject to the federal minimum wage despite Puerto Rico’s economic circumstances that differ greatly from those of the fifty states. For example, Puerto has long endured significantly higher unemployment rates: In December 2012, unemployment in Puerto Rico was 14.4% compared to the national rate of 7.9%; in December 2013, unemployment in Puerto Rico was 15.4% compared to 6.7% nationally (see here). Also, Puerto Rico’s 2012 median household income was $19,429 as opposed to the national median income of $51,371. Putting that stark metric in perspective, a full-time, minimum-wage worker in Puerto Rico earns 75% of median income.

 The Federal Reserve Bank of New York was tasked with studying Puerto Rico’s poorly performing economy and issued Report on the Competitiveness of Puerto Rico’s Economy in July 2012 (see here). The New York Fed cited Puerto Rico’s high unemployment as a principal impediment to its economic competitiveness, and that application of the federal minimum wage was a central cause of unemployment. Among other recommendations, the Fed urged “wider reexamination of the application of the federal minimum wage . . . in order to improve incentives to seek employment and increase the number of jobs available for workers on the Island.”

Whether a minimum wage that’s 25%, 50%, or 75% of median income is helpful or harmful should be for each jurisdiction, like Puerto Rico or Arkansas, to determine for itself. A federal minimum wage suffocates the prerogatives of jurisdictions subject to federal control.

Adhering to principles of federalism encourages robust experimentation, with successes repeated and failures avoided. States are also best positioned to understand and remedy their divergent economic problems. Refraining from raising the national minimum wage reduces its anti-federalist destructiveness.

Part Three, the final installment, to follow.

Viva PRPR!