Get the federal government out of the business of setting the minimum wage for all the states

Get the federal government out of the business of setting the minimum wage for all the states 

March 11, 2014 | By Stephen Slivinski | email

Once again the president is proposing something that will not generate the job growth that America needs. His latest proposal is to raise the national minimum wage from its current $7.25 an hour to $10.10 – which would likely kill 500,000 jobs, according to the Congressional Budget Office, because it prices low-skilled laborers out of the labor market.

The minimum wage sets a floor for wages across the country, and like so many federal policies it treats all states as if they are the same. Yet no one thinks that a dollar buys the same amount of goods in Massachusetts as it does in Mississippi. Just as changes in the cost of living will be different in each state, changes in wage rates will be different too. But a federal minimum wage assumes that $7.25 (or if the Obama administration gets its way, $10.10) is the magic number that can be applied everywhere.

Nearly twice as many people work at the minimum wage in Mississippi as in Massachusetts even though the latter is a much larger state. Now imagine that the federal minimum wage rate is raised by the same amount for all states. You will see more dramatic economic impacts in the lower-cost-of-living states – many of which are among the poorer states in America – in the wake of a nearly $3 increase in the minimum wage because it’s a much bigger hike in buying power than in the high cost-of-living states.

State policymakers and voters are in the best position to make these policy decisions. They already have the ability to raise the minimum wage above the federal minimum. In fact, 21 states and the District of Columbia already have minimum wages above the federal level. (However, none today are as high as Obama’s proposed $10.10.) The majority of economic damage of a rise in the minimum wage would occur in a discriminatory fashion, hitting the poorest states the hardest.

The president and the federal government needs to quit trying to force one-size-fits-all “solutions” like this on our unique states. The federal government could help matters by simply allowing states to opt out of the federal minimum wage and set their own – or to allow them to avoid having a minimum wage altogether. Congress could even go so far as to keep a minimum wage target but adjust the minimum wage downward for states that have a lower cost of living or at least grant those states a waiver to do so.

In any case, a policy reform that allows variation between states would allow states to experiment with the best ways to help their poor workers, just as the federal government does in welfare policy as embodied in the federal welfare reform of the 1990s that allowed states to set their own limits on income transfer programs. There’s no reason to think it won’t help in this policy area, too. In an environment of high unemployment, tying the hands of the states on labor policy is bad economic policy. 

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Stephen Slivinski is an economist for the Goldwater Institute.

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