Why a federal minimum wage?
By Scott Sumner
The recent Amazon decision to raise their workers’ base pay to $15/hour got me thinking about the federal minimum wage, which is currently $7.25 an hour. How many workers are paid this wage?
BLS data shows that in 2017, 0.7% of workers were paid $7.25/hour and another 1.6% of workers earned less than the minimum wage. Most of these workers were employed by restaurants, and when tips are included they generally make more than the minimum wage. Interestingly, whites are the racial group most likely to earn sub-minimum wages, while blacks are most likely to earn right at the minimum. Perhaps the jobs right at the minimum wage are actually worse than the sub-minimum jobs, if the latter are more likely to earn tips. But the problem with this theory is that Hispanics are equally likely as whites to earn right at the minimum (0.6% of white and Hispanic workers, as compared to 1.2% of blacks.) So I’m puzzled. Overall, my hunch is that when tips are factored in, almost everyone earns more than the federal minimum wage. (And even more so today than in 2017, when this data was collected.)
But that’s not why I want to abolish the federal minimum wage. Rather, having states set the minimum wage makes it less likely that the rate will be set too high, distorting the labor market. For instance, California’s minimum is currently $10.50/hour, scheduled to go up to $15/hour in 2023. In Texas, the minimum wage is $7.25/hour. Both states currently have fairly low unemployment rates, which suggests the minimum wage is not having a big effect on employment. Now suppose the California minimum wage goes to $15, while the Texas minimum wage stays at $7.25. Here are several possibilities:
A. Hotel maids in both San Antonio and Bakersfield earn $15/hour, because that’s the market wage in 2023.
B. Hotel maids earn $10 in San Antonio and $15 in Bakersfield.
It seems to me that case B is not a stable equilibrium. In that case, either lots of maids would move from Texas to California to earn the high wages, or lots of maids would move from California to Texas to find jobs unavailable in California. If they were moving on mass to Texas, then California would know that it set the wage too high. If they were moving to California, then Texas employers would have to clean up their act to hold on to their employees.
Isn’t this the whole point of federalism, to have competition among states to see which public policies work best? I can’t even imagine any argument for a federal minimum wage—what would be the point? Avoiding a race to the bottom? How can there be a race to the bottom if minimum wage laws make workers better off? And if they don’t make workers better off, why have a minimum wage?
I’d love to hear from proponents of a federal minimum wage. What’s the theory that justifies your policy preference? The famous Card and Krueger study comparing minimum wages in Pennsylvania and New Jersey is actually a powerful argument for abolishing the federal minimum wage. It showed that New Jersey’s higher minimum did not cost jobs, and hence there is no need for the Federal government to step in. In contrast, it may make sense to tax corporate income at the federal level, as there really might be a race to the bottom if taxes were done entirely at the state level. (Assuming corporate taxes make sense, which is questionable.)
I’m actually opposed to all minimum wage laws. But if I did favor minimum wages, I’d advocate they be determined at the state level, not the federal level. I can’t imagine why anyone would advocate a federal minimum wage. It would be like having a federal law against pot smoking. Actually worse, because with pot it’s plausible that the optimal law in all states is the same. There is no plausible argument that the optimal minimum wage in Massachusetts is the same as in Mississippi. If you set the rate at the appropriate level for the lowest state, then the other 49 states would all have to set their own higher minimums. So then why even have a federal minimum wage?
This is where the Hollywood plot twist comes in. If you are still reading, you’ve likely concluded that I’m a reactionary dinosaur, out of touch with the times. I can hear people saying, “Doesn’t Sumner know that Jeff Bezos and Bernie Sanders and all the other cool people now favor a higher federal minimum wages? Laissez-faire capitalism is dead, everyone now thinks we need to be more like the “socialist” Nordic countries.”
Let’s see. Would those be the Nordic countries that have no national minimum wage, and that let labor groups negotiate industry minimums at levels appropriate in each case, and allow smaller non-union firms to pay any wage they wish?