On July 24, the federal minimum wage will rise to $7.25, the third in a series of increases that included a hike to $6.55 in July 2008 and $5.85 in July 2007. These represent a significant increase from the $5.15 rate that prevailed for a decade.
With the increase in unemployment to 9.5% in June from 9.4% in May, Congress should rethink the hike. Increasing the federal minimum wage is the latest in the Blue State vs. Red State battles, with the congressional leadership spreading the pain to reduce the advantages of states with low state minimum wage laws.
Take California and Massachusetts, home to House Speaker Nancy Pelosi, House Education and Labor Committee Chairman George Miller, and Senate Health, Education, Labor and Pensions Chairman Edward Kennedy, all of whom led the charge for the higher federal minimum wage. These states have minimum wage laws that already exceed the new federal one, so their residents and businesses aren’t affected.
Democratic states in the northeast and the west tend to have state minimum wage rates that are higher than the federal, while states with Republican representation, in the middle of the country, such as Texas, Oklahoma, and Mississippi generally have minimum wage laws that do not exceed the federal minimum.
With the workforce in California, Massachusetts, and Illinois declining, and residents migrating to fast-growing states without state minimum wage laws such as South Carolina and Alabama, congressional leaders had an incentive to change the playing field by spreading the misery.
The lower cost of living in central states makes the higher minimum wage even harder to absorb, because customers can’t pay the higher costs. The same breakfast could cost $10 in a New York diner and $5 in South Carolina. That’s why it makes no sense for Congress to impose blue state rates on the red states, unless it’s to drive up the unemployment rates of their low-skill workers.
Members of Congress assume that if the minimum wage were raised, all workers would retain their jobs. But this is not the case. An increase to $7.25 an hour, plus the mandatory employer’s share of Social Security, unemployment insurance, and workers’ compensation taxes, brings the hourly employer cost close to $8, even without any benefits.
With the minimum wage increase, employers will only hire workers who can produce $8.00 an hour of goods or services. That will be fewer people than they employ today. Employers can change technologies or hire more skilled workers to keep their firms in business.
Denying work opportunities to those whose skills and output don’t add up to $8.00 per hour is not compassionate, it’s manifestly unfair. At a time of rising unemployment, the federal government is dooming unskilled workers to the ranks of the unemployed by saying that they cannot even take the first step on the career ladder. That’s not the road to job creation and economic recovery.
Diana Furchtgott-Roth, senior fellow at the Hudson Institute, is a former chief economist of the U.S. Department of Labor.
