Leave the Minimum Wage to the States

Proponents of labor reform have become increasingly vocal about their aim to increase the federal minimum wage to $15. As recently as January 2020, Senator Bernard Sanders (I-VT) introduced legislation to the Democratic-controlled U.S. Senate to raise the minimum wage to $15. Sanders’ legislation follows previous attempts by the Democratic party to raise the federal minimum wage, most notably the Raise the Wage Act (H.R. 582) that passed the House of Representatives in July 2019.

Aside from the profoundly damaging economic effects of raising the federal minimum wage to $15 that have already been outlined by economists, advocates fail to consider the factors that render a one size fits all federal intervention moot and ineffective. This includes the decline in the number of minimum wage workers, the passage of minimum wage increases at the state level, and the fact that the effects of any minimum wage increase would fall onto workers living in poorer states whose economies can ill afford an unnecessary wage hike.

While advocates of the minimum wage contend low-wage workers need a pay rise, they continually ignore the evidence that shows the number of minimum wage workers has drastically fallen over the last decade. In 2010, the Bureau of Labor Statistics (BLS) estimated only 6% of workers earned the federal minimum wage. By 2017, that number had fallen to only 2.3%. In 2019, that number had fallen even further to 1.9%. Additionally, the BLS reports median weekly earnings for the fourth quarter of 2020 were “5.1% higher than a year earlier.” The fact that fewer Americans are working minimum wage jobs, combined with the rise in median weekly income shows Americans are earning more without the need for an increase in the federal minimum wage.

Advocates of increasing the minimum wage also ignore the significant increase in the number of states that have increased their minimum wages above the federally mandated $7.25. In 2014, only about 23 states had a minimum wage above the federally mandated level. By 2021, however, that number had risen to 29 states. That number will increase in May 2021 when Virginia raises its minimum wage to $9.50.

The fact that by the middle of 2021, over 60% of U.S. states will have a minimum wage rate above the current federally mandated level of $7.25 highlights the fact states have successfully pre-empted the need for a one-size-fits-all federal minimum wage that presumes the cost of living in states such as Oklahoma is the same as California. Additionally, state legislatures are better placed to determine the appropriate minimum wage for their localities than the federal government as they understand the cost of living and what their local economies can support.

Establishing an arbitrary minimum wage at $15 per hour also ignores the significant divergences in the cost of living across the country. It might be reasonable, for example, to set the minimum wage in places such as California or New York at $15 per hour given the high cost of living and dominance of large companies that could absorb large wage increases. The cost of living is simply not that high in states such as Alabama or Missouri, meaning the $15 minimum wage is unnecessary and will impose significant costs on businesses that do not have the financial resources to absorb them. The result of a minimum wage increase in these states will be jobs lost, businesses closed, and the cost of goods increased.

Advocates of raising the federal minimum also fail to consider how its most serious consequences will fall onto poorer states that have more minimum wage workers and lower average annual income. In its economic impact study of the Raise the Wage Act, the Congressional Budget Office (CBO) cautioned that at $15 per hour, 1.3 million Americans could lose their jobs. The CBO warned that this number could potentially rise to 3.7 million.

While this statistic alone is alarming, those job losses would fall disproportionately on states with a higher percentage of workers earning the minimum wage. These states, according to the BLS, are predominantly in the deep south and include South Carolina (5%), Louisiana (5%), and Mississippi (4%). In total, the BLS estimate 777,000 residents of the geographic South earn the minimum wage, leaving them particularly vulnerable to any wage increase driven job losses. Additionally, these states also have some of the highest unemployment rates in the country. Given the significant job losses the CBO estimated, it is highly likely most of the losses would be felt in poorer rural states, not places like California or New York. Aside from the catastrophic economic consequences of raising the federal minimum wage to $15 will cause to businesses, consumers, and the wider economy, it is patently clear that further federal intervention is not required because not only have states have already pre-empted Washington, so too has the wider trend of fewer and fewer workers relying on the federal minimum wage to earn a living. When talking about raising the minimum wage, advocates also ignore the reality that the most severe economic consequences of raising the minimum wage will fall on the states least able to afford it. To do better and ensure minimum wage laws work for workers and the wider economy, the federal government should leave setting minimum wage laws to the states.

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