How California's minimum wage hike experiment could benefit the rest of America

Federalism has its advantages

The minimum slog.
(Image credit: (Benjamin Rondel/CORBIS))

One of federalism's greatest virtues is that it permits states to act as laboratories of democracy. Want to see if social conservatives are right about same-sex marriage undermining the institution of marriage more generally? Then allow some states to legalize same-sex marriage while others ban it and wait for the results over the coming years and decades.

With public opinion rapidly shifting in favor of gay marriage in many places, judges knocking down the remaining legal obstacles to it in others, and the Supreme Court seemingly poised to settle the matter at the national level, it looks like a federalist experiment on the issue isn't in the cards.

But the minimum wage is another story. Efforts to raise the federal minimum have been stalled in Congress for years. That's led a growing list of states and municipalities (Los Angeles being the most recent) to dramatically raise, or plan to raise, local minimums. This sets up a potentially illuminating experiment to test a prediction ventured by many libertarian economists: that raising the minimum wage will harm the very low-wage, low-skilled workers it aims to help.

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Testing this contention is crucial. (Preliminary results have been interesting but inconclusive. The dramatic increases we've seen in local minimums over the past year or so will produce sharper regional contrast and so should also produce clearer findings.) If the libertarian assertion is true, raising the wage will lead some workers in places with higher minimums to be fired, others never to get hired in the first place. Some businesses that rely on and employ low-wage workers could be driven out of business, while others relocate to regions of the country with lower minimums. In a word, if the libertarian economists are right, workers living in higher minimum areas will suffer while those in lower-wage regions will benefit — creating a perfect storm of unintended consequences.

But it's also important to test the libertarian claim in order to clarify the debate at the national level. The more free-trade agreements we enter into with foreign governments, the more the U.S. as a whole begins to resemble a higher-minimum American city or state competing domestically with lower-minimum cities and states. If raising the minimum wage in Los Angeles inspires businesses to leave, or prompts fewer of them to be started there in the first place, that's pretty compelling evidence that raising the national minimum wage will harm American workers as a whole, since it would likely prompt American businesses to ship overseas even more low-skill, low-pay jobs than they already do.

One possibility, of course, is that higher minimums do hurt business but not enough to make a significant difference to employment and other business decisions. (Maybe the costs aren't that high, maybe some of them can be passed along to consumers, maybe the higher wages lead to economic gains in other areas that compensate for the costs.) In that case, there would be no compelling reason not to raise minimums everywhere — locally or nationally — since poor workers would benefit with little harm to anyone.

On the other hand, the libertarian economists could be proven right in their prediction that raising the minimum does far more economic harm than good.

But though this might translate into a good reason not to raise the minimum wage locally — because it could drive business away to areas with lower labor costs — it wouldn't necessarily imply that the federal minimum wage should be kept low. On the contrary, it could help to justify combining a higher federal minimum with a refusal to enter free trade agreements that permit American companies to ship low-skill jobs overseas to cheap labor markets. This wouldn't keep businesses from relocating overseas entirely (or from laying off workers, or hiring fewer of them in the first place). But it would force them to balance the pursuit of cheap labor against the considerable costs of leaving the country altogether. Hopefully most would choose to stay put.

So the federalist experiment we're currently conducting will help us to determine whether it makes sense to raise the minimum wage locally. But the case for raising it nationally is strong whatever the outcome — though perhaps only if we back it up with even greater skepticism about treating the goodness of free trade as economic gospel.

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