Puerto Rico and the Case against One-Size-Fits-All Minimum-Wage Hikes | National Review Online

Puerto Rico and the Case against One-Size-Fits-All Minimum-Wage Hikes | National Review Online

When asked about the effects of a $12 federal minimum wage (not $15, which is the goal of a growing number of labor activists), Freeman gives Wonkblog a few thoughts:

Based on that experience, Freeman thinks a few things might happen if the federal minimum goes up to $12. First, some companies might find ways to work around it, either by having their employees work off the clock or by turning them into independent contractors. That’s not ideal, but it at least allows people to keep collecting some paycheck.


“There are many ways that firms and workers will make sure that people don’t lose their jobs,” Freeman says. “If you say that 90 percent of the people get higher wages, and that’s what you want to have happen, and then 10 percent find ways to wiggle around so they keep their jobs, that’s a pretty good outcome.”

To be clear, Freeman is anticipating violations of labor standards on a mass scale (“having their employees work off the clock”) and a shift to 1099 employment, which I don’t consider a bad thing, necessarily, but which presumably does not mean that business models that “don’t belong in a modern economy” will shut their doors — rather, innovative energies will shift from perfecting a business model to getting around labor regulations. This is a fascinating way to have your cake and eat it too, and it raises interesting questions: Is Freeman suggesting that the 90 percent of the people who get higher wages (an imprecise figure — it’s not clear who he’s referring to) wouldn’t have commanded higher wages over time as they gained experience? And then he tells us that it doesn’t really matter that some others will be adversely affected, because their employers will simply violate the law or embrace a more contingent model of employment.

[I]f jobs do disappear, Freeman figures that people will move to areas of greater opportunity. “Minimum-wage workers tend to be young people, so they’re reasonably mobile,” he says. “Mississippi is the lowest-wage state in the country. If it tips you to move to Georgia, which has higher wages, that’s a reasonable response.”

Mass migration of less-skilled workers might strike Freeman as a painless process, but many low-income families living in Mississippi have been living there for generations, even as friends and relatives have migrated to other regions in search of opportunity. Those who remain often have a very good reason for doing so, and treating the fact that they will no longer be able to find employment in their hometowns as a trivial fact strikes me as unfortunate. Moreover, we know that high-productivity regions in the U.S. tend to also have higher costs. If less-skilled Mississippi workers move in large numbers to Atlanta, some of them will find low-wage work and affordable housing. Others might find it much harder to make their way in a new environment. (And this is not to mention that settling in New York City or the Bay Area would be substantially more difficult for Mississippi workers, given stringent housing regulations in both regions. Indeed, high costs have led many low- and middle-income households to leave these regions and settle in lower-wage, lower-productivity southern metropolitan areas.) For example, some of these workers might have children, and moving away from relatives might disrupt their child-care arrangements. I assume that the solution for this is publicly financed daycare. What other taxpayer-financed benefits will we need to smooth the transition? Think about it: We are going to raise the minimum wage to a level that will cause large-scale disemployment and outmigration from some regions, and then we will spend more money to ameliorate the negative consequences that will result. Wasn’t a higher minimum wage supposed to be a “free” policy that would make poor people better off?

Freeman then offers Wonkblog the following parting thought:

[O]verall, Freeman argues, the evidence from minimum wage hikes in other places — such as Britain and Australia — shows only moderate effects on employment, if any, because governments tend to give businesses time to adjust.

“Put a zero after your wage and mine, and we know that the employer’s going to get rid of us,” Freeman says. “But they never seem to push the minimum really into that dangerous territory. Twelve dollars in three years is not going to incredibly shake up Mississippi.”

It’s worth noting that Australia’s national minimum wage has numerous carve-outs for junior employees, trainee employees, apprentices, and other categories of worker, which are tailored by sector and sub-sector. Australia’s minimum-wage regulations are dizzying in their complexity precisely because the Australian government is wary of disemployment effects. Furthermore, Australia’s relatively high minimum wage is reflected in its substantially higher cost of living and the country takes a more restrictive approach to less-skilled immigration than the U.S. If Australia had more immigrants with less than a high-school diploma, its minimum wage laws might prove more binding. Britain’s minimum wage is similarly not as binding as a $12 minimum wage would be in low-cost regions like Mississippi.
In a recent Slate column, I explain why some economists who favor minimum-wage increases, like Arindrajit Dube of the University of Massachusetts, Amherst, favor a minimum-wage strategy that is sensitive to local wages and prices:

Consider the contrast between Massachusetts, a high-cost, high-wage jurisdiction, and Mississippi, a low-cost, low-wage one. In Massachusetts, very few workers would be affected by an increase in the federal minimum wage to $10.10, as the Bay State already has a $9 minimum wage that is set to increase to $11 by 2017. But in Mississippi, as many as 28 percent of workers would be affected. In Massachusetts, wages are higher, and so are prices. Relatively few employers will have to spend substantially more on their workforce under a higher federal minimum wage, and relatively few will have to raise their prices to account for it. In Mississippi, by contrast, many employers will have to raise their wages, and it’s a safe bet that virtually all of the cost of this minimum wage hike will be passed on to consumers in the form of higher prices. You might think that, well, this isn’t a huge deal if it’s rich people who are paying these higher prices. But of course it will often be poor people who pay them, particularly in a poor state like Mississippi. This makes poor consumers worse off in a direct sense, in that they can purchase less with their earnings. And if consumers are at all sensitive to prices, at least some of them will choose to spend less on labor-intensive goods and services now that they are more expensive. That could reduce the number of minimum wage jobs available.

That is why Dube recommends that state and local governments set minimum wages that take into account local wages and local price levels. Specifically, he advocates setting a minimum wage at half of the median full-time wage in a given jurisdiction, a standard that would have yielded minimum wages ranging from $12.45 in Massachusetts to $7.97 in Mississippi. Suffice it to say, there is a great deal of distance between $7.97 and $15.

I’d suggest that Dube’s approach is far superior to imposing a $12 (or $15) national minimum wage, and that the “Oh well, they’ll just move” or “Oh well, employers will just wiggle around the law” approach isn’t actually that great.