Commentary

No Time for White Flags

By Derrick A. Max
This essay originally appeared on National Review Online. Copyright 2000 National Review.
Before the first shots were even fired in this year’s end-of-session legislative showdown between President Clinton and the Republican leadership, Speaker Hastert decided to raise the proverbial white flag by agreeing to an increase in the minimum wage. In a letter to the president that would be humorous — if it were not for the thousands of low-wage workers who will be unemployed as a result — Speaker Hastert wrote, “I have enjoyed working with you on several issues where we have found common ground. We have been quite successful this year in working together…I would like to propose that we work over the next month to find common ground on your desire to increase the minimum wage by $1 and our desire to help alleviate the burdens on small businesses that would shoulder the costs of such an increase.”

For the uninitiated, this letter is political-speak for “we Republicans are tired of having our teeth kicked in by you during the last few months of the legislative year. Thus, we are caving in to a bad economic policy in hopes that you will be our friend when we are forced to negotiate other tough issues like the patient’s bill of rights, prescription-drug benefits, and education spending.” Fat chance. What did Speaker Hastert demand in return for this tragic concession? Did he insist upon greater tax relief for the small businesses that will be affected by this terrible policy? Sadly, no. In fact, in the fourth paragraph of his letter to the president, the Speaker offers more concessions: “We are also offering to drop the death-tax and pension provisions in the bill that you regrettably find objectionable.” Not exactly a strong starting point for the tough negotiations that lie ahead.

In defense of the Speaker, the debate over the minimum wage is difficult to win — particularly in an election year. While most Republicans (and a few sensible Democrats) understand the economic implications of this policy, namely that forced increases in labor prices lead to less labor being hired, a majority of these sensible officials have been persuaded that the political costs of not raising the minimum wage far outweigh the economic costs of the mandated increase. In short, the economic cost of increasing the minimum wage is limited to relatively few low-skilled, less educated workers (most of whom don’t vote); the benefits, meanwhile, are spread amongst a broad range of more skilled, better-educated workers (more of whom are likely to vote).

Furthermore, the effects of past increases in the minimum wage have been muted by the growing economy and by a shortage of labor. It is one thing to argue about job losses, and quite another to argue about how many more jobs could have been created if the cost of labor had not been increased. Yawn. Unfortunately, the legislative answer to this problem is not to sacrifice low-wage workers on the altar of political survival. Rather, it is time for Republicans to find a “third way” to defeat this terrible, but popular, economic policy.

My proposal is relatively simple. Since most workers make far more than the minimum wage — particularly in states like Connecticut, New York, and New Jersey, where wages run a full 130 percent of the national average, a one-dollar increase in the minimum wage will have little or no effect on workers in those states. In fact, because the cost of living in these states is also much higher, the real value of the proposed increase is minimal. The real effect of the minimum wage is felt in low-wage states like Mississippi, Arkansas, and Georgia, where wages are approximately 70 percent of the national average. This 60-point North-South spread in the cost of hiring new employees is significant—as is the difference in the economic effects of raising the minimum wage.

This fact is not lost on Members of Congress from the North. Their drive to increase the minimum wage is not based on some benevolent desire to increase the wages of their constituents — most of whom already earn wages far exceeding the current minimum. These Northern congressmen are performing a constituent service, hoping to raise the costs of employment in the South and thus restoring the Northern states’ competitiveness in attracting new businesses. The evidence could not be clearer than a list of the names of the Republican cosponsors of the bill to raise the minimum wage — almost all of whom come from Northern districts. This is crass politics at its worst.

The solution is to “equalize” the value of the minimum wage and to spread the pain of having it increased. This can be done by adjusting the minimum wage (and any proposed increase) by variances in the cost of living by region or state (call it the “minimum wage equalization act”). Thus, the current $5.15 minimum wage would become $6.70 ($8.00 after the proposed and adjusted $1 increase) in the Northeast. Likewise, the minimum wage would drop to $3.60 ($4.30 after adding the proposed and adjusted $1 increase) in the South. The government already performs this type of regional adjustment in its published pay scales, as do many private corporations with nationwide operations (if lowering wages is too politically sensitive, states with adjusted minimum wages that are lower than the current minimum could opt to maintain the current $5.15 minimum).

This amendment to the minimum wage would completely change the political dynamics behind this debate. Raising the minimum wage to $8.00 in the North — while on economic par with a minimum wage of $4.30 in the South — would finally force Northern members to face the economic consequences of their supposed benevolence. For the first time, they too would be faced with the unemployment and decreased profits that would result from their legislative actions. Senator Kennedy would be put in the quandary of having to explain to his constituents why it is not in their best interest to have their wages raised by $2.85. Southern states would regain their wage advantage, and attract more businesses.

Obviously, I am opposed to the minimum wage and believe that it is not only unconstitutional, but is bad economic policy. My proposal is merely a suggested means of spreading the pain of the minimum wage broadly enough to make increases in the mandated wage unpalatable. The next two months will be filled with “end game” strategies and brinksmanship maneuvers over numerous policies that will have significant effects on millions of Americans. Raising the white flag on such matters ought to be a last, not a first resort.

Derrick A. Max is the director of government affairs at the Cato Institute.