President Joe Biden and congressional Democrats planned to include a $15 an hour federal minimum wage in the latest COVID-19 relief bill that is currently working its way through Congress. The minimum wage has been stuck at $7.25 an hour since 2009, and Democrats argue that it needs to be increased to a “living wage” as soon as possible. After the bill passed the House of Representatives, however, the Senate parliamentarian — the person in charge of interpreting that chamber’s self-appointed rules — declared the minimum wage increase to be invalid in the relief bill. This bill is technically a budget reconciliation bill, meaning it subverts the Senate’s filibuster rules and can be passed with only a majority, rather than a supermajority, of votes in the Senate.
Even though the minimum wage increase is unlikely to pass as an addendum to the COVID relief bill, Democrats will likely try to increase it with other legislation. This, however, would be unwise and unfair, particularly in the context of the economic destruction caused by COVID-19.
The minimum wage is what economists call a price control — more specifically, it is a price floor. This means that the government artificially sets a certain price in a certain market that participants in the market must reach. Though it may be counterintuitive, employers and employees engage one another in a specific type of market – the labor market. Here, workers act as the sellers of their own labor and the employers act as the buyers. Economists generally view impositions into markets as disruptive, causing inefficiencies that the free market would be able to sort out without government intervention. In the case of the labor market, a minimum wage is likely to cause unemployment. Proponents of the minimum wage point out that the minimum wage improves the economic position of minimum-wage earners.
A recent report by the Congressional Budget Office vindicates both sides of the argument. The report demonstrated that a $15 minimum wage would improve take-home pay over a 10-year period by $509 billion collectively, yet this would be partially offset (by $175 billion) because employers would have to reduce the numbers of hours they grant to their employees. By 2025, the year when the minimum wage would reach $15 an hour, employment would be reduced by 1.4 million people, increasing the unemployment rate by 0.9 percent. At the same time, the number of people living in poverty would be reduced by 900,000.
Of course, reducing the poverty rate would be a good thing. Yet increased unemployment plus the pandemic that has already ravaged small businesses means the minimum wage increase would be more costly than beneficial.
We have heard about the effects that the pandemic-related shutdowns have had on small businesses for close to a year now. This sector of the economy — often called “Main Street” in contrast to the more powerful Wall Street and Silicon Valley — stands to lose much more than large businesses do with an increase in the minimum wage. Smaller businesses have smaller profit margins, meaning they must keep costs low. Payroll is one such cost; increasing that cost by, in some instances, more than 100 percent, would be devastating to small businesses in some states.
Indeed, the state that one resides in plays a huge role in the impact of the minimum wage increase. States can set their own minimum wage laws, so long as it is at or above the federal minimum wage. As a result, state minimum wages vary widely. For instance, in Massachusetts, the minimum wage is $13.50 an hour; in California, it is $13 and hour. Twenty-nine states, plus Washington, D.C. and Guam, have higher minimum wages than the federal minimum. An increase in the minimum wage to $15 an hour would be detrimental to the businesses in the states with the federal minimum of $7.25. In Alabama, for instance, the median wage — not the minimum — is $15.43 an hour. Minimum wage advocates may see this as a travesty — Alabamans must live in abject poverty! — but consider that the average home in Alabama was worth $143,500 in 2017, the 44th-lowest in the country. Compare that to the $485,000 average in Hawaii and you will recognize that not all states are equal in their standard of living; therefore, not all states need the same minimum wage.
Despite the more radical wing of the Democratic Party calling for Biden to overturn the Senate parliamentarian’s ruling regarding the $15 minimum wage in the COVID relief bill, Biden has indicated that he will not do so. This is a good start. However, the minimum wage fight is only just beginning. The federal minimum wage should remain as is, especially in the dire circumstances that small businesses face right now. The federal government should leave these decisions up to the individual states.
Greg Fournier can be reached at [email protected].
