States are frequently called the the laboratories of democracy, as their experiments with everything from education to fiscal policy often are often copied when successful. And one area rife with experimentation in recent years has been the minimum wage, where 30 states and Washington, D.C., have set new levels higher than the federal minimum of $7.25 an hour, in place since 2009.
For the most part, these state rates have been responsible and much needed in the face of inaction from Congress. But two states made moves that raise questions about whether the lab experiments have gone too far. On Monday, California Gov. Jerry Brown and New York Gov. Andrew Cuomo signed legislation that will raise their states' minimum wage all the way to $15 per hour, up from $10 in California and $9 in New York.
The California law is more dramatic. It will raise the entire state to $15 by the end of 2022. New York will hike the minimum wage to $15 in New York City almost immediately, while doing the same thing for prosperous suburbs by 2020. The rest of the state will go to $12.50, with the possibility that it could go to $15 if and when certain economic benchmarks are met.
The sentiment here is right. Wages at the low end have been stagnant for decades, while a relatively small number of upper income Americans have seen their lot improve greatly. With labor markets tightening thanks to the retirement of the Baby Boomers and rising wages abroad, minimum wages at both the state and national levels should be re-examined.
Even so, there is such a thing as too much of a good thing. And California’s plan — and perhaps New York’s — are just that.
Most economists argue that the minimum wage should be about 50% of the median hourly income. California's law will put the minimum wage at nearly 70% of median income if it went into effect immediately.
The state is home to about 5 million people making less than $15 an hour. Some are in such areas as hospitality and health care that are all but impossible to outsource. But 600,000 of them are employed in manufacturing, an industry that could very easily pack up and move away.
California’s legislation is considerably more troubling than New York’s because it will apply evenly in Modesto and Malibu, where the costs of living are radically different. One of the arguments against raising the national minimum wage is that the cost of living on the two coasts and selective states in between is much higher than in states such as Mississippi or West Virginia. The same argument applies within states, where the economies in and around big cities are very different from those in small towns.
To see an example of what an excessive minimum wage can do, consider Puerto Rico, where the unemployment rate of 11.7% is more than twice the national average. To be fair, Puerto Rico has a number of problems holding its economy down. But one frequently cited cause of its doldrums is an artificially high minimum wage. Since it is part of the U.S., the federal minimum wage applies. Yet its economy is more similar to a robust emerging market than a highly advanced developed economy. Its per capita annual income of $23,840 is less than half the $53,750 of the USA as a whole.
States are right to raise their minimum wages if Washington won’t. But $15 statewide might bring more unemployment as well as higher wages.
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