Economy & Business

The Federal Diner: The Case against a National Minimum Wage

A supporter holds a sign during a rally to celebrate the state of New York passing into law a $15 minimum wage, April 4, 2016. (Lucas Jackson/Reuters)
How can a single wage apply to the entire country?

One of the major agenda items for the new Democratic House majority is a proposal to more than double the federal minimum wage, from $7.25 an hour to $15 an hour. The last such hike came in 2007, the last time Nancy Pelosi and her caucus took over the House; a recession and spike in unemployment followed, curbing further demands for minimum-wage increases. The fundamental problem, however, is not with the minimum wage so much as the national minimum wage.

The minimum wage, like all attempts at a command economy, is based upon the idea that there is an ideal “fair” price, in this case a “living wage,” that can be set by the government, not the market. Longtime observers are wearyingly familiar with the policy arguments for and against minimum-wage laws in general and the dueling studies that flow across all of these fronts:

 On first principles, liberals argue that it’s unfair to let people work for peanuts, while conservatives argue that people are free to work for whatever they freely choose to accept.

 On workers, liberals argue that you can’t raise a family on the minimum wage, while conservatives argue that most minimum-wage workers are not long-term head-of-household workers but young, single, and/or part-time. The latest Labor Department surveys as of 2017, for example, show that 65 percent of minimum wage workers are part-time workers, 49 percent are between age 16 and 24, and 68 percent have never been married.

 On jobs, conservatives argue that the minimum wage throttles job growth for small businesses and entry-level workers because raising the cost of something results in less of it, while liberals argue that the job losses resulting from the minimum wage are overstated or unmeasurable. Conservatives also argue that higher minimum wages lead to more replacement of workers with machines.

 On goods and services, conservatives argue that driving up wages eliminates some services and makes basic goods more expensive, a cost that falls hardest on the buying power of the poor and low-wage workers themselves; liberals argue that it is worth it to provide benefits concentrated on low-wage workers, in exchange for costs shared by consumers across society.

But 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 minimum-wage law for the entire country, covering every local labor market from Midtown Manhattan to rural 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” labor 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 the people most likely to work “off the books” for a lower wage: illegal immigrants?

1. Why a Single Federal Minimum Wage?

When you step back from the general policy debate to the specific case for a national minimum wage set by the federal government, it becomes obvious how implausible it is. Nobody would claim with a straight face that labor conditions and the cost of living 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? Liberals argue that they are trying to avoid a “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 that if some states want to swim against the laws of economic reality, we should let them suffer the consequences without exporting them. Why should other states be compelled against the will of their own people to suffer for what California wants?

A second problem is that most minimum-wage jobs actually are not all that mobile, so the net result of a single federal rule is 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. Those who get income from tips may qualify for a lower wage, and there are other exemptions as well, including a $4.25 wage for teens’ first 90 days of employment and special programs for the disabled and students.

Further, the great bulk of minimum-wage jobs are not manufacturing but service jobs, in the types of businesses that provide services on-site to local customers. Again, the Labor Department keeps detailed statistics on the characteristics of minimum-wage and exempted sub-minimum-wage workers, who as of 2017 made up 2.3 percent of the workforce (1.8 million workers), down from more than 15 percent when Ronald Reagan took office in 1981 (meaning, presumably, that the market has been raising wages in many areas to keep up with inflation without congressional prompting). And only a third of those make the federal minimum wage; the other two-thirds are below the minimum wage due to one of the exemptions.

When you look at types of workers, you see that 69 percent of all minimum-wage workers are employed in service occupations (triple those jobs’ share of the work force, and up from 51 percent in 2005), including a whopping 53 percent majority in “Food preparation and serving related occupations” (up from 34 percent in 2005). Another 11 percent are in “Sales and related occupations”; 7 percent are in “Personal care and service occupations” and 4 percent in “Building and grounds cleaning and maintenance occupations.” Looking at industries, 61 percent are in “Leisure and hospitality” (up from 41 percent in 2005), another 11 percent in “Retail trade,” 9 percent in “Education and health services,” and 4 percent  in state and local government.

Jobs at or below the federal minimum wage are also geographically concentrated. Regionally, 50 percent are in the South, and another 29 percent in the Midwest or Mountain West. The deep-blue states of New England and the Pacific West make up just 6 percent of federal-minimum-wage jobs, yet those states provide 34 percent of House Democrats. At a state level, minimum-wage workers make up about 4 percent of the work force in Kentucky, Tennessee, Mississippi, South Carolina, Virginia, and Louisiana. Nobody else is above 3.5 percent. California, which has the highest poverty rate in the country when cost of living is accounted for, also has the lowest proportion of workers at or below the federal minimum wage (0.5 percent).

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. Kentucky can’t steal burger-flipping jobs from Seattle, because nobody wants to drive from Seattle to Kentucky for a hamburger, or to have their hospital sheets changed or their lawn mowed. If Kentuckians get priced out of these jobs, the jobs 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 have no effect favoring lower-wage jurisdictions, of course. Capital can still move. Where small businesses are less profitable, they will attract fewer investors and lenders; where national chains are considering expanding, the local wage climate will give them greater incentives to seek out lower labor costs.

In short: 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 simply eliminates 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 then turn around and allow some states to end-run the federal rule by raising their own minimum wages above the federal limit — while forbidding states to enact lower minimum wages? How on earth does this make sense?

Under current law, 29 states and D.C. have a minimum wage 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 states in blue have a minimum wage above $7.25 an hour, the highest being $13.25 in DC:

That’s before we count the cities that have mandated current or future local minimum wages as high as $15, such as Seattle, San Francisco, New York, Los Angeles, Minneapolis, Oakland, and Berkeley. Some progressive activists now want minimum-wage laws as high as $33 an hour. A main reason why there are states with very few federal-minimum-wage workers, such as California, is that it is illegal to work for the federal minimum wage there.

If the federal minimum wage is not satisfactory in these locales, isn’t that an 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 and cities — many of them blue areas represented by House Democrats who support 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” labor 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.) This turns out to be surprisingly similar to the Trump administration’s economic arguments against immigration and trade, yet Democrats don’t seem to see how these issues are related.

Specifically, illegal immigration is the Achilles’ heel of enforcing minimum-wage laws. Any student of even elementary economics in the real world knows that if you artificially raise the price of something, you risk creating a 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 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 an hour, and certainly lower than $15 an hour. They thus have perfectly rational reasons to be willing to work for less than that here. Raising the minimum wage only increases the likelihood that jobs now offered to legal American citizens will instead be given to illegal aliens.

But how do Democrats propose 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? Sure, the standard Democratic argument is that legalizing current illegal aliens will bring a lot of people out of the shadows, but that does nothing to stem future entrants — to the contrary, it gives more people an incentive to come here. Yet Democratic rhetoric has if anything grown much more stringent against both border enforcement and interior enforcement. You don’t have to buy the entire Trump agenda on immigration to recognize the incoherence and unseriousness of leading a federal fight to prevent labor competition while turning a blind eye to one of its major sources.

Conclusion

Even if you buy the case for a minimum wage in the abstract, the idea of extending it nationally, allowing some states to render it moot by enacting a higher minimum wage, and failing to prevent evasion of the minimum wage by illegal immigrant labor should demonstrate to any fair observer that the Democrats aren’t serious about a federal minimum wage being good or effective policy.

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Dan McLaughlin is an attorney practicing securities and commercial litigation in New York City, and a contributing columnist at National Review Online.

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