Minimum Wage, Public Choice, and other Federal-State Standards

The minimum wage is on the front page again and the topic comes with curiosities worth thinking about.  Eighteen jurisdictions have minimum wages above the current federal wage of $5.15 per hour.  In some states, the minimum wage applies to small employers or to employees otherwise exempt from the federal wage law.  The federal minimum has not been raised in some time, and yet in some states the matter continues to generate active political interest and support.  Most interesting, in 2004 two states (Nevada and Florida) raised the minimum wage through ballot initiatives.  Only about half the employees directly affected by minimum wage legislation are under the age of 25, and half of those are teenagers, though it is likely that when the floor rises (apart from any job losses) there is upward pressure on wages of those above the floor.  Who votes for these increases and why?

There is some evidence that the minimum wage has little if any impact on jobs, and it certainly seems to have less impact than most of us were taught in microeconomics many years ago.  One likely reason for this is that wages are only a small part of the employment picture.  Employer-supported health care coverage and retirement benefits may have more to do with the employment decision than a raise of $1 here and there.

As for the politics, an employer that is already bound to pay more than the minimum may like a law that requires competitors to raise its lowest wages. Employees of these "high wage" employers may also like increased minimum wages; even if they think that there is a marginal affect on consumer prices, they may like the increased costs that fall on "their" competitors.  Of all the explanations for support of minimum wage legislation, this one seems best at explaining the spotty enthusiasm at the state level.  Nationally, a voter might prefer no wage legislation because the possibility of lower entry-level wages is still associated with the possibility of increased employment for the previously unemployed.  It might also be seen as good for the country's competitive ability in the international marketplace.  But at the state and local level, a voter might see a higher minimum wage as equalizing the playing field, so that all who work for higher-wage employers (where wages may have risen because of unions, production technology or other reasons) prefer that the low-wage employers be required to raise their lowest wages.

The same could be true of environmental and other regulations.  A voter might prefer (or not) further federal environmental controls, depending on his or her perception of the costs and benefits of these laws, including international competitiveness.  But once some local firms or simply one's own employer is required to meet a standard, or meets is because it has acquired new and cleaner equipment, say, then the voter wants competitors to be required to meet the standard as well.

It is more difficult to extend the argument to other regulations because voters might actually approve of their substance. An employee or employer that chooses to provide generous family leave or that manufactures very safe products might be better off if competitors were forced to match these offerings, but might be better off if competitors were not - so that the firm could distinguish itself with its terms of employment or safer products.  At the same time, voters associated with the safer, more generous, or otherwise "super-legal" firm might simply believe that what they do is morally right or the result of a cost-benefit decision that others (in their opinion) misassess.  If so, they might vote for more regulation because they think everyone ought to abide by these rules.  That would not explain the state-by-state nature of minimum wage laws, which is why I prefer the local-level-playing-field explanation, but it is something to bear in mind as the argument shifts to other laws.

Comments

[dan levine]

Dean Levmore,
Couldn't there also be political pressure in the opposite (i.e., downward) direction? For example, an employer with wage-insensitive employees might lobby for a lower minimum wage than the one currently prevailing. A lower minimum would allow it to lower its labor costs without losing employees while its competitors who face union-pressure (or any other form of upward pressure, or more wage-sensitive employees) would be stuck with higher costs.
Of course such employers couldn't push state wage levels below the federal minimum, but they could keep them from rising above the federal level. Are you just suggesting that in some states there are more super-wage-paying employers than in others?

Best,
Dan

[slevmore]

Agreed, in a sense. Current minimum wage laws, state and federal, are the product of various interest group pressures (among other things) and can be thought of as in a kind of equilibrium. No doubt they would be higher if not for some employers, consumers, and wrokers holding them down, as you say. My claim responds to the puzzle, or at least what I identify and claim as a puzzle, of why some states raise minimum wages. It is a puzzle because economists generally think consumers are made worse off, and it is a puzzle that the states are not particularly strong labor states. When the voters of Florida and Nevada vote for higher minimum wages, there is something interesting going on.

[Ross]

Might it be that, to the extent that the overall economy is improving, voters simply feel that minimum wage workers should be allowed to share in the bounty? An implicit expression of voter's desire for the moderation of increasing economic disparity (i.e., fairness)?

Similarly, perhaps current public sentiment supports a higher minimum only because inflation has become less of a concern in the public's mind.

This doesn't explain why it's happening at the state rather than national level. But maybe its easier to ask why it has not happened at the national level. That answer to that seems clear: Republican dominance. It may also be that both parties desire not to alienate certain large donors - a concern that can be skirted at the state level through the ballot initiative process.