The problem with a one-size-fits-all federal minimum wage hike
Minimum wage mandates aren’t free. They force employers to make difficult decisions and tradeoffs. When government forces wages up, non-wage pay goes down: Workers get less paid time off, shorter breaks, higher insurance premiums, and fewer perks. Some workers lose their jobs. Some younger and less experienced workers never get hired at all. Yet, the pain is rarely spread around evenly.
That is because the cost of living varies widely across different regions of the country. In high-cost Manhattan, for example, these tradeoffs may barely be visible at a $15 minimum wage, because wages there are already in that range. In smaller towns where costs and wages are lower, the tradeoffs would be severe. This is the regional differences argument. It is the primary reason why the push for a $15 federal minimum wage is facing an uphill battle in the Senate right now.
House members often represent heavily urban or heavily rural districts, so they don’t have to worry much about regional differences. Senators do, because they represent entire states. They have constituents in expensive big cities and constituents in lower-cost small towns. Something barely felt in downtown Chicago might not play as well in Peoria. This is one reason why minimum wage bills such as the Raise the Wage Act routinely pass the House yet stall in the Senate.
Regional differences are also why President Biden, whose constituency is the entire country, said that it “Doesn’t look like we can do it” about including a $15 minimum wage in the next COVID-19 spending bill.
The regional differences argument is why there should be no federal minimum wage at all. Different regions with different economic conditions should not have the same wage policy. States and cities are, rightly, free to set their own policies, and most already have. Twenty-nine states currently have minimum wages well above the current federal minimum of $7.25 per hour.
Many cities, in both blue and red states, have their own city-wide minimum wages beyond state requirements. These don’t impose on smaller communities with lower living costs. If we must impose minimum wage laws, that is the way to do it.
The Congressional Budget Office (CBO) recently estimated that about 1.4 million people would lose their job if the federal minimum wage goes up to $15. But what the CBO does not take into account is that most tradeoffs are more subtle than that, and that’s why other studies often find smaller unemployment effects.
Firing people is a last-resort option. No employer wants to do that. Fortunately, employers are much more creative than economic models give them credit for and are good at finding less obvious ways to cut costs so more workers can keep their jobs.
How? Minimum wage laws only affect wage pay, but most workers also make non-wage pay. The mix of wage pay and non-wage pay is different at every company and for every worker. But when legislation drives wage pay up, non-wage pay, in whatever form, usually goes down and cancels out much of the wage hike. For many affected workers, total compensation would be almost unchanged.
That does not mean zero job losses. It also does not mean that younger, less experienced workers won’t be hurt. But it does explain why unemployment effects are often smaller than economists expect. Minimum wages have many tradeoffs. Unemployment is just one of them.
Servers and bartenders in Washington, D.C. stumbled upon one such trade off. They found out that customers tend to tip less when they know their servers have a high minimum wage. The resulting public outcry from service workers prompted the city council to exempt tipped workers from the city’s standard minimum wage, which increases to $15 on July 1.
Minimum wages are not a free good. They have tradeoffs. While politicians might not pay much mind to such economic arguments, they are well aware of the regional differences among their constituents. If they listen, they should reject a one-size-fits-all federal minimum wage hike and, instead, let cities and states make decisions that best suit the people in their communities.