Abolish the Federal Minimum Wage

There is a real danger that a $15 federal minimum wage would slow the recovery and induce a long-term decline in employment. Even before Covid-19, sober mainstream analysis conducted by the Congressional Budget Office estimated that a $15 minimum wage would reduce employment by 1.3 million jobs in 2025.

To their credit, some left-of-center politicians and analysts have acknowledged this danger and suggested tweaks to minimum-wage policy designed to minimize job losses. It’s a noble goal, but their proposals would only make things worse.

The minimum wage is damaging not only because it induces employers to cut hours or let existing workers go. It’s also harmful because it dampens the incentives for, and flexibility of, entrepreneurs to develop new ways to employ people who are out of the job market.

Trying to fix the defects of a one-size-fits-all policy with exemptions and more regulatory complexity wouldn’t help. Instead, Congress should step aside and let states and localities determine what minimum wage is best for their residents. Freezing the federal minimum at $7.25 per hour would accomplish that to some extent. Some 90% of minimum wage workers already live in places with an hourly minimum between $7.50 and $15.

Or how about this: Abolish the federal minimum wage entirely.

It sounds radical. But it fits the kind of unorthodox tight-labor-market policies the Federal Reserve and the federal government have been following, successfully, for several years.

The first of these polices, from the Fed, is committing to zero interest rates until and even after inflation begins rising. Another, from the government, is cutting nearly a trillion dollars in business taxes and “offsetting” those cuts with hundreds of billions in domestic spending increases, leading to larger increases in employment than economists thought possible. Wages also started to rise faster for lower-paid workers than for high earners.

As a consequence, median household income surged to record levels just before the pandemic hit. Economists had assumed that gains of this magnitude were impossible because they viewed low levels of employment as the result of structural changes in the economy. Others, like Andrew Yang, blamed the losses on robots. Still others argued it was globalization, in particular competition from China.

One famous study even concluded that improvements in video-game technology had rendered millions of young men detached from the world and effectively unemployable. Eventually, however, tight labor markets forced employers to find ways to use gaming to their advantage.

In short, these policies worked because they increased the demand for labor so much that employers were forced expand the type of workers they were willing to hire. And once hired, employees were given greater on-the-job training opportunities, while employers invested in techniques and practices to boost the productivity of relatively low-skilled workers.

Raising the minimum wage undermines this process. It leads employers to focus on finding the most employable workers — applicants who’ve sought out training for themselves, for example, and are ready to take advantage of the most advanced technology.

Exemptions such as a lower minimum wage for small businesses don’t solve this problem because they tend to lock in old ways of doing things. Say, for example, that an innovative small business designs a process that low-wage workers can learn to use through on-the-job training. If successful, ideally the business would keep offering the same opportunity to more and more low-wage workers. That very growth, however, would disqualify the firm from the exemption, limiting the number of workers who can take advantage.

Entrepreneurs and local governments are in the best position to fashion policies that address their specific conditions. The best solution is for Washington to focus on maximizing macroeconomic conditions and leave the microeconomic solutions to the locals.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.

©2021 Bloomberg L.P.

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